Residential Capital LLC ( fka RDCC)

[Enterprising Investor]

In ResCap Bid, a Savvy Move by Berkshire (6/14/12)

By STEPHEN J. LUBBEN

Breakup fees and bidding procedures in many Chapter 11 cases often have a certain amount of charade to them.

This can be particularly true of so-called 363 sales – when distressed companies sell their assets before a reorganization plan. In such cases, if a bankrupt company isn’t expecting more than one bid, it can offer a big breakup fee to the initial bidder because it does not expect to pay it. A similar reality applies in regard to bidding procedures, a point that was often lost on critics of the General Motors and Chrysler sales, particularly those in academia.

But every now and then, there actually is competitive bidding, like with the proceedings involving Residential Capital, the bankrupt mortgage unit of Ally Financial. The United States bankruptcy trustee already objected to the bidding procedures before the conglomerate Berkshire Hathaway came along to make a bid this week.

The Berkshire bid would trump the current plan to split ResCap into mortgage origination – which the Fortress Investment Group had bid on — and legacy assets, which would go to its parent company, Ally. As part of the deal, Fortress had negotiated a $82 million breakup fee.

Berkshire says it’s willing to take both and get a breakup fee of just $24 million. Berkshire then plans to allow others to make offers, but it has now set the floor for other bidders.

Note that Berkshire wins both ways with this new approach. According to press reports, Berkshire holds some $900 million of ResCap debt. If it can get a good auction going for the ResCap assets, it would increase how much it can recover on that debt. And if it can pick up a $24 million breakup fee in the process, its return is even better.

A cynic might suggest that Berkshire’s pending motion to appoint an examiner to look into ResCap’s transactions with its parent company might also increase the return on Berkshire’s holdings.

If nothing else, the Berkshire bid is a shot across Ally’s bow.

Stephen J. Lubben holds the Harvey Washington Wiley chair in corporate governance and business ethics at the Seton Hall University School of Law and is an expert on bankruptcy.

http://dealbook.nytimes.com/2012/06/14/in-rescap-bid-a-savvy-move-by-berkshire/