Residential Capital LLC, or ResCap, filed for Chapter 11 bankruptcy protection in New York, unable to make payments on debt taken out to finance soured home mortgages. The filing will separate the money-losing ResCap subsidiary from Ally's auto loan and banking businesses, allowing the latter businesses to grow and speed up repayment of Ally's bailout from 2008 and 2009, Ally said in a statement.
Ally also said Monday that it is exploring the possible sale of its international operations, a move that also should help strengthen its finances and make payments to the government. International businesses include auto loan, insurance and banking operations in Canada, Mexico, Europe, England and South America.
Ally, which is 74 percent owned by the U.S. government, was the financial arm of General Motors Co. until the banking industry meltdown in 2008. It needed a $17.2 billion bailout to survive the downturn. Ally has repaid about $5.5 billion and it still owes the government just under $12 billion. The government is hoping to get the rest of the money back through a public stock offering by Ally, or perhaps the sale of its remaining businesses.
When the bankruptcy and potential sale of international operations are finished, Ally expects to repay two-thirds of its bailout, or about $11 billion. The additional payments could come by year's end, the company said.
"We believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial," Assistant Treasury Secretary Timothy Massad said in a statement. ResCap is a separate company, and the government does not hold any debt or equity in it, the government said. The ResCap board decided to seek bankruptcy protection on Sunday.
Ally's statement said that ResCap has reached agreements with its key creditors for a speedy bankruptcy. But Ally has to put up $150 million for bankruptcy financing and pay $750 million to ResCap to make the deal work. Ally also will make the first bid on up to $1.6 billion worth of troubled mortgages that will be auctioned. The agreements made before the filing have milestones for ResCap to come out of bankruptcy protection by the end of the year, Ally said.
ResCap also has agreements with big investors in mortgage-backed securities to support the bankruptcy reorganization, Ally said.
Ally makes loans to GM and Chrysler customers and finances dealer inventories. The government first bailed out the company, then known as GMAC Inc., in late 2008 as part of the Bush administration's aid to the auto industry. The Obama administration provided additional funding in May and December 2009.
But ResCap has been a drain on Ally's finances for years, struggling to make payments on its heavy debt ever since the bottom fell out of the U.S. housing market in 2007. In regulatory filings before the bankruptcy, Ally said that deterioration in the U.S. housing market has led to fewer sources of money for ResCap, which is highly leveraged due to mortgage defaults.
Without the bankruptcy filing, ResCap would have needed billions of dollars from Ally to pay its debts "which would have substantially delayed Ally's plans to repay the remaining capital investment to the U.S. Treasury," Ally's statement said.
In the filing with the U.S. Bankruptcy Court in New York, ResCap lists $15.7 billion in assets and $15.3 billion in debt. The filing says that ResCap has reached a deal for companies funded by private equity firm Fortress Investment Group LLC to buy ResCap's assets.
ResCap's net worth dropped below limits required by its loan agreements in the fourth quarter of last year, but it was saved because Ally forgave some of the debt that it was owed by ResCap. But Ally said in its most recent quarterly filing with the Securities and Exchange Commission that it may not help ResCap anymore.
ResCap also is close to defaulting on a $20 million interest payment that was due on April 17. The payment, on $473 million in unsecured loans, can be made within 30 days of the due date, but it doesn't look like ResCap can pay.
The mortgage unit remains heavily reliant on Ally for funding "and there can be no assurance that Ally or its affiliates will continue such actions," the filing said.
ResCap also owes Ally roughly $1.9 billion, with $500 million of the debt unsecured. Ally said in the filing that may lose the money it loaned to ResCap as a result of the mortgage company's bankruptcy filing.
Detroit-based Ally anticipates taking an approximately $1.3 billion charge in the second quarter related to the ResCap filing.
