Attempting to speed up its repayments to taxpayers, bailed-out lender Ally Financial put its troubled Residential Capital division into Chapter 11 bankruptcy and said it would consider strategic options for its international operations.
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Formerly the financial arm of General Motors (NYSE:GM) known as GMAC, Ally has struggled to repay some $12 billion in bailout cash it still owes U.S. taxpayers.
Ally said ResCap, which was saddled with billions of dollars of toxic subprime mortgages, and some of its subsidiaries filed for Chapter 11 in an effort to clear obstacles preventing those repayments.
“The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us," Ally CEO Michael Carpenter said in a statement.
Ally warned that if it hadn’t put ResCap through bankruptcy, the business would have required “billions of dollars of support” to meet its obligations and delay the repayment process.
Ally attempted an IPO in early 2011, however that effort was scuttled due to concerns about ResCap’s mortgage portfolio and troubles in the IPO market.
“While it is unfortunate that a Chapter 11 filing became necessary for ResCap, we believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial,” Timothy Massad, the Treasury Department’s assistant secretary for financial stability, wrote in a statement.
Ally said the ResCap bankruptcy won't cause a change or interruption to its business operations.
The prearranged bankruptcy filing includes proposed settlements among Ally, ResCap’s Chapter 11 estates and certain creditors that provides for the release of existing claims between Ally and ResCap.
To support the bankruptcy, Ally said it has agreed to make a $750 million cash payment to the estate upon confirmation of the plan, making a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages and provide $150 million in debtor-in-possession financing.
As a result of the bankruptcy, Ally said its equity interest in ResCap will be written down to zero. Ally plans to take a $1.3 billion charge in the second quarter, driven by the loss of equity stake and $750 million cash payment.
Meanwhile, Ally surprised some by saying it will explore strategic alternatives for all of its international operations, which includes auto finance, insurance and other businesses in Canada, Mexico, Europe and South America.
After it completes its strategic initiatives, Ally said it expects to return at least another third of the government’s total investment in the company. Ally has already repaid $5.5 billion.
The moves announced on Monday "will allow Ally to focus 100% of its energies on further strengthening its already leading U.S. auto finance and direct banking franchises,” Carpenter said.