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After Ally Financial disclosed its struggling mortgage unit ResCap missed a payment on its debt, Barclays Capital analysts warned of more trouble from a possible bankruptcy.
According to the filing Tuesday, ResCap will not be considered in default for 6.5% notes due April 2013 for another 30 days. The bank said $473 million is outstanding.
"ResCap now has a 30-day grace period before creditors can accelerate the debt and declare an event of default. We think the missed payment suggests that ResCap may be heading toward a bankruptcy proceeding or is using the threat of a bankruptcy filing to corral investors into reducing the company's debt burden," according to a BarCap note released Wednesday. "We expect some resolution to the uncertainty surrounding a Rescap filing within the next one to two months."
The pooling and servicing agreements on residential mortgage-backed securities serviced by ResCap show some potential problems. Should ResCap be put into bankruptcy, the trustee would become the master servicer on the underlying mortgages if a majority of the stakeholders direct it to, or it could negotiate a contract with a new servicer.
BarCap analysts said if ResCap is not able to sell the mortgage servicing rights before filing for bankruptcy, the government-sponsored enterprises or the trustees of private-label RMBS can transfer the rights away without paying ResCap.
Nationstar, the Texas based servicer owned by Fortress Investment Group, has been rumoured as a buyer of those MSRs.
But there is the possibility that the trustees of the ResCap RMBS would split the servicing rights among several servicers based on performing or nonperforming status, though finding servicers for less valuable subprime rights would be difficult.
It's unclear if the new servicers would have to adhere to the $25 billion foreclosure settlement Ally struck with the state attorneys general and federal prosecutors, though settlement documents show new servicers would have to honor the commitments.
"Prior to any filing, we would expect a sale of the servicing rights to a successor servicer, as that would maximize value for the estate," BarCap notes. "However, we can not rule out the possibility of a messy bankruptcy filing if ResCap is unable to complete a sale with another servicer. If this occurs, we expect some short-term servicing/cash flow disruptions on non-agency loans serviced by ResCap and a transfer of servicing to either the trustee or a servicer chosen by the trustee."
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