Residential Capital LLC, the mortgage-lending unit of Ally Financial Inc. (ALLY:US), triggered payouts on more than $1 billion of contracts linked to its debt, according to the committee of banks and investors that govern credit-default swaps.
The International Swaps and Derivatives Association’s determinations committee said on its website that ResCap’s Chapter 11 petitions yesterday in Manhattan for itself and 50 units constitute a bankruptcy credit event. The panel of the New York-based group will hold an auction to settle the contracts.
Banks, hedge funds and other money managers had bought and sold credit swaps that protect against a default on a net $1.2 billion of ResCap obligations as of May 4, according to the Depository Trust & Clearing Corp., which runs a central repository for the market. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Zurich-based UBS AG, Switzerland’s biggest bank, submitted the request for a ruling from ISDA’s determinations committee on May 14, the association said on its website. The committee for the Americas is made up of 15 banks and investment firms including JPMorgan Chase & Co. and D.E. Shaw Group.
ResCap, once among the largest originators of subprime and Alt-A mortgages, listed assets of $15.7 billion and liabilities totaling $15.3 billion. The Chapter 11 reorganization for ResCap is the biggest this year, based on liabilities, according to data compiled by Bloomberg, and one of the biggest collapses of a home lender since Wells Fargo & Co. agreed to acquire Wachovia Corp. at the end of 2008.
The reorganization plan that ResCap is to file by June 15 is supported by holders of 37 percent of the $2.1 billion of junior secured notes, according to a court filing. A Chapter 11 filing protects a company from creditors and allows it to operate while a turnaround is devised.
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