Reuters: Bankruptcy News: Elliott urges Ally against ResCap bankruptcy

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Elliott urges Ally against ResCap bankruptcy Mar 26th 2012, 04:00 Mon Mar 26, 2012 12:00am EDT * Elliott says Ally should sell core assets -letter * Elliott says ResCap bankruptcy will trigger lawsuits * ResCap bankruptcy to take several more weeks -sources * Buffett's Berkshire a significant ResCap creditor -sources By Soyoung Kim NEW YORK, March 26 (Reuters) - Hedge fund Elliott Management sent a letter to Ally Financial's board last week saying a bankruptcy filing for its mortgage subsidiary would trigger a protracted legal battle against the lender and make its proposed public offering "nearly impossible" for several years. The New York-based hedge fund, which is one of Ally's largest shareholders, said the bailed-out lender should pursue an out-of-court debt exchange for Residential Capital and sell its core assets to a financial institution, according to a March 22 letter sent to Ally's board, a copy of which was reviewed by Reuters. "The fact remains that addressing the risks in the mortgage business is the key to successfully pursing any and all future strategies to best position the company to return value to its shareholders and that is our highest priority," an Ally spokeswoman said. Elliott and U.S. Treasury declined to comment. Elliott has 2.3 percent of the common stock of Ally, the former lending arm of General Motors Co previously known as GMAC, according to the letter. The U.S. Treasury owns a 73.8 percent stake after its bailout of the lender during the financial crisis, while GM and its trust have 9.9 percent and Cerberus Capital Management owns 8.9 percent. The letter from Elliott comes as Ally is readying a ResCap bankruptcy in coming months, according to people familiar with the matter, in an effort to distance itself from the troubled mortgage business and put its stalled IPO back on track. Ally Chief Executive Michael Carpenter has stressed that ResCap does not have unlimited support from the parent company and is considered a separate legal entity with its own board. But ResCap creditors believe Ally and ResCap are one and the same, and a bankruptcy filing for ResCap would throw Ally itself into a costly legal battle over loss claims on risky mortgage-backed securities sold by the unit. "We believe the board greatly overestimates its chances of successfully managing a clean and efficient process in bankruptcy," the Elliott letter said. "A large, complex bankruptcy with multitudes of contentious litigation would likely foreclose the possibility of an IPO or sale of the assets or equity of Ally for at least 2 years," it said. BANKRUPTCY NOT IMMINENT Ally is in talks to sell ResCap to Fortress Investment Group LLC through a bankruptcy process, people familiar with the matter have said. That means a deal would become the so-called stalking horse bid in a subsequent auction overseen by the bankruptcy court, where other bidders would have a chance to come in with counterbids. A ResCap filing is not iminent and will take at least several more weeks to finalize, the sources said, adding that it will slip beyond the end of March timeframe when ResCap faces financing and liquidity deadlines. But there is pressure to get a filing completed before mid-May, when ResCap faces a maturity on unsecured notes, the sources said. The negotiations with Fortress about selling ResCap are still ongoing, while several government agencies including the U.S. Federal Reserve, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac would need to sign off on bankruptcy plans, the sources said. Ally and ResCap prefer to work out a pre-arranged bankruptcy, under which the company reaches settlements with key creditors before a filing, the sources said. But the filing is expected to fall short of a typical pre-packaged bankruptcy, the sources said, noting that it remains almost impossible to settle loss claims related to the loans ResCap originated and sold before the housing market collapse in a short timeframe. Law firm White & Case, which announced in January it represents some ResCap secured bondholders, is currently representing investors who hold more than 45 percent of junior secured notes at ResCap, the sources said. Billionaire Warren Buffett's Berkshire Hathaway has another 45 percent of the junior secured notes and also holds a significant portion of ResCap unsecured notes that mature in May, they said. ResCap is expected to have parallel discussions with these two main bondholder groups to reach settlements, the sources said. Ally ran into trouble during the financial crisis as its mortgage loans soured, forcing the government to inject more than $17 billion in 2008-2009 to keep the company afloat. Ally said it has since repaid $5.4 billion. Last year, the lender shelved plans for an IPO aimed at repaying the government as problems mounted at ResCap and market conditions deteriorated in the wake of the European debt crisis. Link this Share this Digg this Email Reprints

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