By Stephanie Gleason
Residential Capital LLC struck a deal with Financial Guaranty
Insurance Co. to cut the bond insurer's $5.55 billion claim to
$596.5 million.
The settlement filed Friday brings ResCap, once the
fifth-largest mortgage servicer in the country, a step closer to
the end of its Chapter 11 case, but still requires bankruptcy-court
approval.
Primarily, the settlement resolves the $5.55 billion in FGIC
claims, but it also releases another set of claims related to
trusts insured by FGIC. All together, ResCap is releasing $6.85
billion with this agreement, according to documents filed with the
U.S. Bankruptcy Court in Manhattan.
ResCap is requesting that the court approve the settlement prior
to an Aug. 19 deadline, put in place by a deal it reached in May
with its parent Ally Financial Inc., which it calls the "global
plan agreement."
"The Settlement Agreement, while a stand-alone agreement,
represents a critical component of the Global Plan Agreement, and
is intrinsically linked to FGIC's rehabilitation in the Supreme
Court of the State of New York," ResCap said in court documents.
"As a result, absent approval of the Court of this Motion, that
milestone will in all likelihood not be reached, thereby triggering
a termination event with respect to the Global Plan Agreement,
which the Debtors and most of their claimant constituencies
painstakingly negotiated with [U.S Bankruptcy Court Judge James]
Peck's assistance."
Under the "global plan agreement," Ally agreed to pay $2.1
billion to ResCap and ResCap's creditors in exchange for a swath of
legal releases.
Some of ResCap's creditors, which include American International
Group Inc. (AIG), Paulson & Co., MBIA Inc. (MBIA) and Allstate
Corp. (ALL), had threatened to hold Ally responsible for billions
of dollars in ResCap mortgage losses prior to reaching the
agreement.
ResCap filed for Chapter 11 bankruptcy a little more than a year
ago as litigation over soured mortgage securities mounted and bond
payments loomed.
The Chapter 11 filing was intended to help Ally, which isn't
part of the bankruptcy, make a clean break from ResCap so it could
move forward with repaying the bailout it received through the
Troubled Asset Relief Program.
Ally, formerly General Motors' main financing arm and once known
as GMAC, is now 74% owned by the U.S. government after receiving a
bailout during the financial crisis that topped $17 billion. The
company has repaid about $6.1 billion of the $17.2 billion it
received, including dividends and interest, and executives have set
their sights on eliminating $5.9 billion of the firm's mandatory
convertible preferred shares, or MCP, owned by the Treasury
Department.
--Patrick Fitzgerald contributed to this article.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Stephanie Gleason at stephanie.gleason@dowjones.com
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