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Ally’s ResCap Files For Bankruptcy Protection

May 15, 2012
4 min to read


DETROIT — Hoping to strengthen its financial position and accelerate its repayment of the U.S. Treasury’s investment, Ally Financial announced yesterday that its mortgage subsidiary, Residential Capital LLC, has filed for Chapter 11 bankruptcy protection in New York.


The company also announced that it is exploring the possible sale of its international operations. Company officials said these actions will enable Ally to further invest in and grow its U.S.-based automotive services. They added that these decisions will put the company in a better position to return additional capital to the U.S. taxpayer by year-end.

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"The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us," said Ally CEO Michael A. Carpenter. "This action, along with pursuing alternatives for the international businesses, will allow Ally to focus 100 percent of its energies on further strengthening its already leading U.S. auto finance and direct banking franchises."


Ally has paid approximately $5.5 billion to the U.S. Treasury, about one-third of the investment made in the company. Upon successful completion of the announced strategic initiatives, Ally expects to have returned a total of two-thirds of the taxpayer's investment.


ResCap filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. In connection with the Chapter 11 filing, ResCap announced it has reached agreement with key creditors, including Ally, on the terms of a prearranged Chapter 11 plan.


Ally Financial, Ally Bank and all other Ally entities are not part of the ResCap Chapter 11 cases and there will be no change or interruption to Ally's business operations, officials said. In addition, ResCap and its origination and servicing platform are expected to continue normal operations through the process.


Ally also has agreed to take certain steps to support the stability of ResCap and its mortgage servicing platform, including making a $750 million contribution to the ResCap Chapter 11 estate upon confirmation of the plan. The finance source will also make a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages currently marked at 45 percent of UPB.

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ResCap has also obtained support for its prearranged Chapter 11 restructuring from the ad hoc steering committee representing ResCap's junior secured notes, as well as other certain note holders. To date, the company has gained support from entities holding $781 million of these notes.


Ally is expected to record an associated charge of approximately $1.3 billion in the second quarter of 2012. The estimated charge is primarily driven by a write-down to zero of Ally's approximate $400 million equity investment in ResCap, the $750 million cash contribution and approximately $130 million related to the establishment of a mortgage repurchase reserve at Ally Bank that replaces a reserve previously held at ResCap.


Officials said ResCap would have required billions of dollars of support from its parent to meet its obligations, which would have substantially delayed Ally's plans to repay the remaining capital investment to the U.S. Treasury, officials said.


"The decision by the ResCap board to pursue this course will best enable it to preserve more than 3,500 jobs and keep its talented workforce focused on assisting homeowners by servicing the more than 2.4 million loans in its portfolio," Carpenter said.


International Businesses Ally, which operated independently of the company’s U.S. operations, will also explore strategic alternatives for all of its international operations, which includes auto finance, insurance, and banking and deposit operations in Canada, Mexico, Europe, the U.K. and South America.

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Since 2009, Ally has been an instrumental part of the U.S. auto recovery and, through its automotive finance operation, has provided financing for nine million vehicles sold to more than 6,000 U.S. auto dealers and has assisted American consumers in financing vehicles worth almost $100 billion.


"Ally was a key part of supporting the recovery of the U.S. auto industry by ensuring that thousands of dealers and millions of consumers had access to financing during the crisis,” Carpenter said. “We took that responsibility very seriously and take equally seriously the mission to repay the remaining U.S. taxpayer investment in full as soon as possible.”

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