Ally Financial Inc.'s troubled mortgage subsidiary filed for Chapter 11 bankruptcy early Monday, potentially paving the way for Ally to sever itself from substantial litigation that has been a drag on its other operations and prevented it from repaying the remainder of its government bailout.
In a surprise move, Ally also said it separately would pursue the sale its international operations, including auto-finance businesses and insurance operations, to maximize its ability to get out from under government ownership.
The decision for the mortgage unit, Residential Capital, to file for Chapter 11 bankruptcy occurred Sunday when the subsidiary's board met to vote on the matter. The move has been widely expected for several weeks, as ResCap faces millions of dollars of bond-related payments starting this week. Ally said last month that ResCap was actively considering a bankruptcy filing.
By severing itself from ResCap, Ally hopes to focus its efforts on its core auto-lending and online banking business, though it still faces significant risks.
The lender has been hit with billions of dollars worth of lawsuits over soured mortgage securities and claims to buy back shoddily underwritten loans by mortgage insurers and investors.
The ResCap bankruptcy filing, made in New York, potentially eliminates some of those hurdles for Ally.
As part of the bankruptcy, Nationstar Mortgage Holdings Inc., a mortgage-servicing company 80% owned by Fortress Investment Group LLC, will make a "stalking horse" bid valued at about $2.4 billion for ResCap assets, ResCap said. Ally is also making a bid valued at about $1.6 billion for a portfolio of ResCap loans. Other potential buyers will also be able to make competing bids for ResCap assets.
ResCap has also lined up a debtor-in-possession loan of $1.45 billion from Barclays PLC to allow it to continue operating while in bankruptcy. Ally will provide ResCap with a separate DIP loan of $150 million and make a $750 million payment to ResCap's estate, said Michael Carpenter, chief executive officer of Ally.
That payment is part of a settlement Ally reached with ResCap over potential claims that could arise over the separateness of the companies and mortgage-repurchase claims against ResCap, Carpenter said.
Such issues have been a lingering question mark over Ally's ability to make a clean break from ResCap, whose creditors could claim the companies are too intertwined to separate through a bankruptcy. Carpenter has repeatedly stressed ResCap is a separate company with its own board and should be treated as such.
"We are confident that there would be no basis for those attacks," Carpenter said in an interview Sunday night. "It's not because we feel we have a huge liability. It's just because we...want to put it behind us and be done with it and not fight about it."
Ally also said ResCap has obtained support from an ad hoc steering committee representing the subsidiary's junior secured notes and other noteholders representing $781 million in debt. ResCap has also reached settlements with creditors who hold certain mortgage-backed securities issued by ResCap's affiliates, which are subject to Bankruptcy Court approval.
All told, Ally expects to take a charge of about $1.3 billion related to ResCap's bankruptcy, Carpenter said. Ally warned last month in a regulatory filing that a ResCap bankruptcy could cost it $400 million to $1.25 billion.
Ally, the former in-house financing arm for General Motors Co., is now 74% owned by the government after receiving a bailout during the financial crisis that topped $17 billion. The lender, which primarily finances GM and Chrysler Group LLC dealers and customers, was bailed out as part of the government's broader rescue of the auto industry.
The U.S. Treasury Department last week told Ally it would support a ResCap bankruptcy filing if that was the route ResCap's board decided to take, a Treasury official told The Wall Street Journal.
Ally has paid back about $5.5 billion of its bailout, and the various transactions it announced could help bring its repayment to the government to about two-thirds of its total bailout, Carpenter said.
Ally expects to sell its international businesses, which account for about $30 billion in assets and have operations in about 15 countries, in pieces, Carpenter said.
"We made the decision that in order to accelerate the process of repayment to the U.S. Treasury, this was in fact the best course of action from the point of view of the American taxpayer," Carpenter said. "This is a very major restructuring of the company and it's all about making both the bank and the auto franchise in the U.S. even stronger."
As mortgage challenges mounted last year, Ally put on hold plans for an initial public offering, which was intended to help pay back its remaining government bailout.
While there are no definite plans to move forward with an IPO, one is "certainly a possibility if not a probability" in the future, Carpenter said.
ResCap employs about 3,600 workers, who are expected to be transferred to Nationstar when the acquisition closes, said Thomas Marano, who runs Ally's mortgage operations and is chairman and CEO of ResCap. ResCap expects to close the sale at the end of the year, Marano said.
