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Berkshire Hathaway makes move to acquire ResCap assets

Berkshire Hathaway offered to serve as a stalking-horse bidder to purchase the assets of Residential Capital under better terms than under the company’s current deals with Nationstar Mortgage and Ally Financial.

As reported, Residential Capital filed for Chapter 11 on May 14 with agreements in hand to sell its mortgage origination and servicing businesses to Fortress Investment Group’s Nationstar for about $2.3 billion, and sell its legacy portfolio, consisting mainly of mortgage loans and other residual financial assets, to its parent company, Ally, for $1.4 billion. The deals are subject to higher bids, and proposed sale procedures to govern the auction for the assets is now pending before the Manhattan bankruptcy court. A hearing is scheduled for June 18.

Among other conditions, the Nationstar deal includes a breakup fee of $72 million, plus reimbursement of expenses of up to $10 million, if Nationstar is ultimately not the successful bidder for the assets.

In an objection to the proposed procedures filed yesterday, Berkshire said it would offer to purchase the mortgage origination and servicing businesses on the same terms as Nationstar, but with a breakup fee of only $24 million and no expense reimbursement, “representing an incremental benefit to the estates of nearly $60 million if there is additional bidding for the mortgage business at auction.” As reported, ResCap’s chairman and CEO said in mid-May, when the company filed Chapter 11, that he expected additional bidders for the assets.

With respect to the loan portfolio, Berkshire said it would pay $1.45 billion, beating Ally’s purchase price by $50 million.

Berkshire also said that while its offer includes a break-up fee of 3% of the purchase price, “it provides the estates with a stalking-horse option that is not bound up with, and complicated by, the parent’s efforts to implement its prepetition settlement with the debtors and to obtain broad releases under a Chapter 11 plan.”

Berkshire explained that the structure of Ally’s proposed deal allowed it to buy the loan portfolio either in an asset sale outside of a reorganization plan for $1.4 billion, or alternatively to pay an additional $200 million for the loan portfolio, for a total purchase price of $1.6 billion, in a sale completed in the context of a Chapter 11 plan that contains broad liability releases for Ally.

As Berkshire sees it, however, this option unfairly benefits Ally because “no other purchaser stands to benefit in any way from the inclusion of such releases in the plan.” As a result, the filing states, “All other prospective bidders lack any incentive to submit an offer that exceeds the intrinsic value of the loan portfolio as a standalone asset [and] … other bidders may be discouraged from participating in the auction if they believe the loan portfolio assets are worth somewhere between $1.4 billion and $1.6 billion.”

Berkshire asked the bankruptcy court to “decouple Ally’s interest in purchasing the loan portfolio as a standalone asset from its separate and unrelated interest in obtaining broad releases under the debtors’ plan.” Specifically, Berkshire wants the sale procedures amended to state that for purposes of evaluating bids, only Ally’s $1.4 billion bid – the one unrelated to potential releases in a reorganization plan – would be used for comparison purposes.

As reported, the U.S. Trustee in the case also objected to the proposed procedures, arguing, among other things, that the breakup fees and the minimum bidding increments for the auction ($25 million for the origination and servicing businesses and $15 million for the loan portfolio) would chill bidding (see “U.S. Trustee says ResCap’s tough auction terms may chill bidding,” LCD, June 12, 2012). – Alan Zimmerman

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