Berkshire Proposes Buying ResCap Assets in Bankruptcy
06/11/2012| 08:03pm US/Eastern
By Andrew R. Johnson
Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) is seeking to buy mortgage assets of Residential Capital LLC, the bankrupt lending unit of government-owned Ally Financial Inc. (GMA.XX).
Berkshire offered to be the "stalking horse" bidder for a servicing portfolio of $374 billion of mortgages that ResCap already has a proposed agreement to sell to Nationstar Mortgage Holdings Inc. (NSM), a monoline mortgage servicer that is majority owned by Fortress Investment Group LLC (>> Fortress Investment Group LLC). It also seeks to buy a portfolio of ResCap mortgages for which Ally has agreed to service as the stalking-horse bidder.
Berkshire's offer for the mortgage-servicing portfolio is a better deal than Nationstar's proposal, because it includes a smaller break-up fee than what Nationstar is set to receive if it loses, the company said in a court filing Monday.
The filing was first reported by Bloomberg News.
Spokeswomen for ResCap and Ally declined to comment Monday. A representative for Nationstar didn't immediately respond to an inquiry.
Berkshire, one of ResCap's largest creditors, has raised questions over ResCap's proposed deals with Nationstar and Ally and has pushed for the U.S. Bankruptcy Court to approve the appointment for an independent examiner to investigate the deals as well as past transactions between ResCap and Ally.
Looming bond payments and mounting litigation over soured mortgage securities prompted ResCap to file for Chapter 11 bankruptcy on May 14 in a move intended to help Ally sever itself from legal exposure. As part of the filing, ResCap proposed selling most of its assets, including the servicing rights to $201 billion of mortgages and subservicing contracts on $173 billion of mortgages, to Nationstar in a $2.4 billion deal.
Separately, it also proposed selling a loan portfolio to Ally for $1.6 billion, though that price is dependent on the sale being consummated as part of a bankruptcy plan that would absolve Ally of liability in pending and future litigation. Ally would pay $1.4 billion for the portfolio outside of the bankruptcy.
Berkshire said it is proposing the same purchase price for the mortgage assets "on substantially the same terms as the agreement with Nationstar." However, it would receive a $24 million breakup fee if the deal didn't get approval as opposed to a $72 million fee that Nationstar has proposed. Nationstar also would receive up to $10 million in expense reimbursement if the deal didn't go through, while Berkshire's proposal doesn't include that.
Berkshire's proposal "represents an incremental benefit to the estates of nearly $60 million if there is additional bidding for the mortgage business at auction," the filing said.
The company also said it would pay $1.45 billion for the loan portfolio that Ally is bidding on. While the proposal "does provide for a break-up fee of 3 percent of the purchase price, it provides the estates with a stalking-horse option that is not bound up with, and complicated by, the parent's efforts to implement its prepetition settlement with the debtors and to receive broad releases under a Chapter 11 plan," Berkshire said.
The additional amount Ally has proposed paying as part of a deal approved through the bankruptcy "comes at a heavy cost because no one but the insider parent will pay for a release of claims and no other bidder can make a competing offer that will preserve those claims for the benefit of the estates," the filing said.
U.S. trustee Tracy Hope Davis on Monday launched an objection to ResCap's sale process, insisting the rules and rewards laid out by ResCap could chill bidding by other parties. Davis cited the breakup fees and expense reimbursement that Nationstar would receive as well as minimum bid requirements that competing parties would have to make.
ResCap Chairman and Chief Executive Officer Thomas Marano last week said he expected additional bidders to emerge for its various assets, but felt Nationstar was in the best position to complete the deal.
Ocwen Financial Corp. (OCN), which competes with Nationstar, is interested in bidding, John Britti, Ocwen's chief financial officer, said last week. Apollo Global Management LLC (>> Apollo Global Management LLC), BlackRock Inc. (>> BlackRock, Inc.), Blackstone Group LP (>> The Blackstone Group L.P.) and TPG would also be logical bidders for ResCap assets, a person familiar with the matter said at the time.
ResCap is proposing a Sept. 14 deadline for rival bids. If it receives any, an auction would be set for Sept. 25 at the Manhattan office of Morrison & Foerster LLP, ResCap's bankruptcy counsel. ResCap hopes to have a sale hearing by the end of October.
The company will ask a judge to approve its auction procedures at a June 18 hearing.
--Joseph Checkler and Rachel Feintzeig contributed to this article.
Write to Andrew R. Johnson at email@example.com