ResCap Swaps Soar as Lender Said to Seek Prearranged Bankruptcy
February 08, 2012, 10:45 PM ESTBy Mary Childs
Feb. 8 (Bloomberg) -- The cost to protect against a default by Residential Capital LLC soared after the Ally Financial Inc. mortgage unit was said to be talking to buyout firms to sell itself through a prearranged bankruptcy.
Credit-default swaps on ResCap jumped 13.3 percentage points after the report to a mid-price of 54.8 percent upfront as of 1:16 p.m. in New York, according to broker Phoenix Partners Group. That means the upfront cost to protect $10 million of ResCap bonds from default for five years jumped to $5.48 million from $4.15 million before the report. The initial costs are in addition to $500,000 annually.
ResCap and its financial advisers are talking to buyout firms including Fortress Investment Group LLC and Cerberus Capital Management LP about the option of selling itself through a pre-packaged Chapter 11 filing, according to people with knowledge of the matter, who declined to be identified because the discussions are private.
That is among options being explored as Detroit-based Ally, ResCap and their advisors aim to craft a plan for the unit by the end of March, before ResCap encounters financing and liquidity deadlines, said the people.
A benchmark gauge of U.S. credit risk climbed amid concern negotiators may fail to reach agreement on steps needed to tame Greece’s debt crisis.
Greece Negotiations
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 0.4 basis point to a mid-price of 95.4 basis points at 1 p.m. in New York, according to Markit Group Ltd.
The gauge increased after Greek Prime Minister Lucas Papademos began negotiating with political parties supporting his government on measures needed to qualify for rescue funds after postponing the meeting yesterday. Papademos has conducted an unscheduled meeting with the European Commission, the European Central Bank and the International Monetary Fund to put the final touches on terms required for a 130 billion-euro ($172 billion) rescue package.
The index, which typically falls as investor confidence improves and rises as it deteriorates, touched 94.3 basis points on Feb. 6, the lowest level since August. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
--With assistance from Jeffrey McCracken and Zachary R. Mider in New York and Dakin Campbell in San Francisco. Editors: Shannon D. Harrington, John Parry.
To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
