Ally settlement may be a boon for ResCap bondholders
While bond insurers MBIA Inc and FGIC Corp receive the lion's share of Ally Financial Inc's $2.1 billion contribution to the debts of mortgage lender Residential Capital LLC, hedge funds like Paulson & Co may have obtained a better deal.
Under an agreement made public on Thursday, MBIA and FGIC, which insured residential mortgage-backed securities issued by ResCap, get about $1 billion - a bigger share of the total pot than they would have received in an earlier version of the settlement. Other bond insurers get a total of $96 million.
But the insurers have had to pay billions of dollars in claims stemming from the failed securities - MBIA alone has already paid out more than $2 billion - and may have to pay more in the future.
Paulson and other holders of ResCap's unsecured notes, on the other hand, may have made a profit. The noteholders will receive $351 million or so, about 35 cents on the dollar for their roughly $1 billion in claims.
While Paulson has not disclosed what it paid for its stake, it is likely making a profit. The bonds were trading lower than 30 cents on the dollar last May, when ResCap filed for bankruptcy, according to bond tracking program TRACE. They dipped to 24 cents at the beginning of this year, but have since risen to about 34 cents, TRACE shows.
Ally Financial said on Thursday it would pay $2.1 billion to creditors of ResCap, its bankrupt mortgage unit, up from the $750 million it had previously offered to settle the same claims against it.
ResCap estimates it will now have about $2.5 billion to pay to unsecured creditors - the contribution from Ally plus another $400 million or so from the proceeds of unliquidated assets.
The agreement was filed in bankruptcy court in New York and is subject to court approval. Under the agreement, MBIA will receive about $800 million and FGIC will get $206.5 million.
Paulson is the largest holder of ResCap's unsecured bonds. Dan Kamensky, a partner at Paulson, did not return a call on Thursday. In a statement, Kamensky said "we are supportive of the settlement that allows Ally to move forward as a leading automotive financial services company."
Holders of residential mortgage-backed securities - of which there are more than 40,000 among 392 separate RMBS trusts - will recoup about $672 million.
The settlement also resolves ongoing litigation, including a securities class action led by the New Jersey Carpenters Health Fund, which will receive $100 million. A trust created for the benefit of other private securities claimants will receive $226 million.
(Reporting by Nick Brown; editing by Eddie Evans and Matthew Lewis)