NEW YORK (
may be close to selling its
mortgage unit to
Fortress Investment Group
as part of a $3 billion bankruptcy sale.
New York Post
that taxpayer-owned Ally Bank will put ResCap into a pre-packaged bankruptcy, paving the way for Fortress's $ 2 billion bid for the troubled mortgage lending unit and another $1 billion for a $130 billion mortgage servicing rights portfolio run by Ally, citing unnamed sources.
The potential sale, which would need a judge's approval, could help Ally Bank repay some of the $17 billion in emergency loans it took from the government during the financial crisis and remove one of the biggest barriers for the former banking and auto-finance arm of
to eventually go public in an IPO or be sold in pieces to lenders like
reports that after finding few options to repay $12 billion still owed to the U.S. Treasury, which holds a 74% stake in the bank, Ally chief executive Michael Carpenter is now working to put ResCap into a Chapter 11 bankruptcy with the support of the Treasury. In bankruptcy, Fortress would then buy ResCap's loan servicing and mortgage origination businesses, while also making a bid on Ally's fee-based mortgage servicing portfolio.
In mid-April ResCap missed a $20 million debt payment, fanning speculation that it could file for bankruptcy as $300 million in debt payments come due from May 5 till June, the
New York Times
reported. The unit also recently caused Fitch Ratings to consider a cut to Ally Bank's senior debt rating, which already stands at BB-, a junk rating. As of March 31, Ally had extended $1.4 billion in financing to ResCap,
In first quarter earnings, Ally Banks net income more than doubled to $310 million, as its mortgage unit that includes ResCap turned a profit of $191 million after a string of lossmaking quarters.
At this time last year, media reports involving Ally Bank centered around the prospect of a $6 billion initial public offering that would have been smaller in size than General Motors 2010 offering, but roughly the same as
looming IPO slated for May 17. However, liabilities related to loan losses and litigation from the housing bust at
made an initial public offering unlikely, according to Feb. 2011 reports from
and comments from CEO Carpenter.
Recent legal settlements may help accelerate Ally's repayment of taxpayer funds through asset sales such as ResCap. In February, Ally and four of the nation's largest banks including JPMorgan,
Bank of America
, Wells Fargo and
agreed to a $25 billion settlement on the litigation. In that settlement, Ally Bank paid out the $110 million in cash on behalf of ResCap.
With a $6 billion IPO of Ally Bank less likely, analyst estimates of the value of ResCap provide valuable insight for investors, should the Treasury decide to go ahead with a share or asset sales.
In a February research note, bank research firm KBW wrote that Ally's deposit-taking banking unit could garner strong interest from some of the nation's largest lenders like
if Ally were sold in pieces. Other assets include an auto finance unit and an in-dealership insurance business.
"We believe that Wells Fargo is one of the few large banks with the interest and balance sheet to take down the entire business," wrote KBW in the Feb 21 note that calculated a buyout of Ally's banking unit would cost $2.1 billion and would add 7% or 20 cents a share to Wells Fargo's 2012 earnings per share.
Other businesses, like Ally's auto lending unit and its non-ResCap insurance business could draw bids by General Motors and Berkshire Hathaway, noted KBW. In 2011, Ally financed $40 billion in contracts for roughly 1.5 million new and used cars and trucks, tops in the U.S.
Still unclear in Tuesday's report by
is if and how Ally Bank would get ResCap creditor support for a possible bankruptcy sale to Fortress.
reports indicated that bidders for ResCap included Fortress, Ally Bank's former owner
and a co-bid from
could take an equity stake in the unit, in a pre-packaged bankruptcy where bonds are converted to share holdings. With $500 million in Ally and ResCap bonds, Berkshire is one of ResCap's largest creditors. Overall, the unit's largest bondholder is
Pacific Investment Management
In January, a group of creditors representing $800 million worth of bonds formed a consortium to seek alternatives to a bankruptcy filing that may best preserve their claims. "The Rescap Creditor Group is concerned with media reports that assert that Ally may attempt to abandon Rescap without taking responsibility for Rescap's liabilities," said the creditors in a Jan. 9 statement. "A forced Rescap filing would be a big mistake and create significant litigation against Ally," they added.
To be seen is if the reported sale would get support from the creditor group; however, with strategic value to Ally Bank's deposit taking and auto lending businesses and some uncertainty removed from its mortgage unit, asset sales could be a way for the Treasury to have its loans repaid.
The U.S. Treasury is the majority shareholder and we do know the Treasury is looking to wind down its TARP program in the near future which could mean recouping investment in Ally through a company sale," wrote KBW in February.
If Ally Bank sells ResCap in bankruptcy, watch for the likes of Wells Fargo and General Motors to begin circling its other assets.
-- Written by Antoine Gara from New York.