Top ResCap, Ally Executives Testify at Plan Hearing

   By Joseph Checkler 
 

NEW YORK--Residential Capital LLC's restructuring chief said on Wednesday that claims between the mortgage lender's units weren't given much thought during settlement talks with creditors and parent Ally Financial Inc.

On the second day of court hearings on ResCap's liquidation plan, Chief Restructuring Officer Lewis Kruger was questioned by a lawyer representing dissident holders of junior secured bonds about these so-called intercompany claims. The bondholders say their holdings are secured by these claims to the point that they should be classed as being "oversecured," which would entitle them to hundreds of millions of dollars in interest accrued since ResCap's May 2012 filing for Chapter 11 protection from creditors. But ResCap's creditor payback proposal treats those claims as worthless, mostly because of how many outside creditor constituencies had to be considered in settlement talks.

While the hedge funds holding these bonds are expected to be paid in full for the $1.1 billion in principal and interest accrued before the bankruptcy filing, they're fighting for payment of additional interest accrued after ResCap filed for Chapter 11 protection. Asked if he had any problem with the junior bondholders being paid interest for the period following the filing, Mr. Kruger appeared non-committal, saying just: "God bless 'em."

The Chapter 11-exit proposal from ResCap, a subsidiary of government-controlled Ally, has the support of all the company's major creditors except the junior secured bondholders. After they were deemed "undersecured" and not entitled to the additonal interest in the first phase of a trial on the matter, Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan allowed them to make the case that their bonds are secured by claims ResCap's units have against one another. If they prevail, they could be deemed "oversecured," which would trigger payment of the interest accrued post-bankruptcy.

The dissident bondholders also questioned Thomas Marano, ResCap's former chief executive and current chairman, as well as Ally Chief Executive Michael Carpenter.

Judge Glenn has set aside six days for hearings on the plan, which is based largely on a settlement ResCap and most of its creditors reached with Ally. Under the deal, Ally agreed to pay $2.1 billion to settle claims that it had set ResCap up for failure.

Most major objections to ResCap's Chapter 11-exit plan have been settled, except for that from the dissident bondholder group, which is made up mostly of hedge funds, including Aurelius Capital Management LP and Davidson Kempner Capital Management LLC. Warren Buffett's Berkshire Hathaway Inc. owns more than $900 million of those same notes but isn't a part of the group fighting for the additional interest payment, though it could benefit should the dissidents win.

Under ResCap's restructuring plan, most unsecured creditors would receive around 35 cents on the dollar. The junior secured bondholders would get paid in full. Another key settlement in the case gives holders of more than a million ResCap mortgages a $7.3 billion allowed claim, which in a best-case scenario would net them $700 million in cash, according to court papers.

ResCap, once one of the country's largest mortgage servicers and mortgage lenders, filed for Chapter 11 protection in May 2012 as litigation over soured mortgage securities mounted and bond payments loomed. The move was intended to help Ally, which isn't part of the bankruptcy, cut its ties with ResCap and focus on repaying the federal bailout it received during the financial crisis.

During its bankruptcy, ResCap struck deals to sell mortgage-servicing platforms and loan portfolios as a part of bankruptcy auctions that generated $4.5 billion in proceeds.

When ResCap first filed for Chapter 11 protection, Ally was set to pay $750 million to settle the ResCap claims but later agreed to the $2.1 billion deal after a court-ordered examiner concluded that while Ally didn't set up ResCap for failure, as some creditors have charged, the $750 million settlement would have been too low.

When he took the stand Wednesday, Mr. Carpenter, Ally's CEO, said he still believes the ResCap creditor claims were "very weak."

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)

Write to Joseph Checkler at [e-mail]

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