Bloomberg News

Fortress Said to Be in Talks to Pay $1 Billion for ResCap

March 15, 2012

Fortress Investment Group LLC (FIG) is in talks to pay more than $1 billion to acquire assets from Ally Financial Inc. (ALLY)’s mortgage unit, according to three people with direct knowledge of the matter.

Fortress would buy parts of the Residential Capital unit, including some of its servicing business, as part of a ResCap bankruptcy filing in the coming weeks, said the people, who asked for anonymity because the process is private. ResCap is lining up as much as $2 billion in loans to fund operations when it files, they said.

A sale of ResCap assets would help Ally (ALLY) shrink its mortgage business as the lender works to repay a government bailout that swelled to $17.2 billion. Ally Chief Executive Officer Michael Carpenter, who once predicted that an initial public offering could value the company at $30 billion, said last month the IPO won’t happen until there’s progress on the mortgage business. The company faces litigation tied to private-label mortgage securitizations.

“It appears that Fortress is only bidding for a small portion of ResCap, which suggests the wind-down could take longer than people expect,” said Kirk Ludtke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC.

Asset Values

ResCap had $16.8 billion in assets at year-end, including mortgage-servicing rights valued at $1.2 billion, according to a company presentation. Servicing involves billing and collections and, when homeowners don’t pay, foreclosures and evictions.

Fortress is being vetted by Fannie Mae and Freddie Mac, the government-controlled mortgage-finance companies, to ensure it can handle the servicing volume, two of the people said. The New York-based private-equity firm outbid companies such as Centerbridge Capital Partners LLC to enter into exclusive talks, said one of these people.

Fortress may fold the servicing operations into Nationstar Mortgage Holdings Inc., the residential-mortgage servicer it took public this month, according to one of the people. Fortress still owns about 77 percent of Nationstar, according to data compiled by Bloomberg.

Fortress shares rose 8.5 percent to $4.07 in New York trading. Nationstar gained 4 percent to $14.45. Fortress is up 20 percent this year.

Liquidity Deadline

Ally and ResCap had been seeking to reach an agreement on a transaction before the end of March, when the unit faces financing and liquidity deadlines, people familiar with the matter said in February. The filing may drag into April now, said one person, citing Fannie Mae and Freddie Mac’s review of Fortress.

Gina Proia, a spokeswoman for Detroit-based Ally, declined to comment.

Barclays Plc, Citigroup Inc. and JPMorgan Chase & Co. (JPM) are among lenders that would probably provide the so-called debtor- in-possession financing, the people said. ResCap needs a DIP loan as large as $2 billion because a line of credit with Citigroup is set to expire at the end of March, one person said.

ResCap is required to maintain its net worth above $250 million, as measured monthly, under agreements it has with Fannie Mae, Freddie Mac and other lenders. ResCap dropped below that level at the end of December before Ally forgave almost $200 million in inter-company debt.

Investors holding at least $800 million in ResCap debt, including John Paulson’s Paulson & Co. and David Tepper’s Appaloosa Management LP, had joined together to oppose a bankruptcy filing. Advisers to the group have since signed confidentiality agreements with ResCap to get inside information on the ResCap sales process, one person said.

Credit Facility

Ally may forgive a $1 billion senior secured credit facility if it helps get bondholders to sign on to the filing, one person said. Ally has warned in regulatory filings that the loans may be wiped out. ResCap had about $2.6 billion of so- called funding arrangements with Ally at the end of December, according to Ally’s annual filing.

A sale may also make it easier for Ally to pass Federal Reserve stress tests. The company, one of four that fell short on at least one measure in the Fed’s test of how 19 of the nation’s biggest lenders would fare in a severe economic slump, said in a statement it planned to resubmit in the “near future.”

Stress Test

Ally’s Tier 1 common capital ratio fell to 2.5 percent under the Fed’s worst-case scenario, primarily because of losses and repurchase requests tied to soured mortgages. Ally said in an e-mailed statement the Fed’s analysis overstated some risks and didn’t account for some of the auto and home lender’s financial and management resources.

The U.S. Treasury Department boosted Ally’s capital in late 2010 when it converted $5.5 billion of preferred stock into common shares, increasing its stake to 74 percent. The government still holds $5.9 billion of preferred shares that must be converted into common equity by Dec. 30, 2016.

The company didn’t say whether the original capital plan it submitted to the Fed or a new one would involve a resolution on ResCap.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net


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