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Tuesday, 21 November 2017

US Restructuring

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Skinny dipping: As Ally severed Residential Capital in bankruptcy, the task of coming up with the liquidity to keep the business afloat long enough to run an auction fell to Barclays who structured a unique DIP solution drawing on several corners of the bank’s expertise. The ResCap DIP is IFR’s US Restructuring of the Year.

To see the full digital edition of the IFR Americas Review of the Year, please click here.

Ally Financial sought bankruptcy protection for its sub-prime mortgage unit Residential Capital on May 14 after months of carefully choreographed negotiations. Among the most important steps was locking up financing that would keep ResCap from triggering defaults on its mortgage servicing contracts – defaults which would have allowed trustees to snatch lucrative servicing pacts, setting off an all-out war among creditors.

Barclays stepped in to underwrite a US$1.45bn debtor-in-possession facility for ResCap, but the deal wasn’t so simple. Indeed, the UK bank had to navigate a labyrinth of potential conflicts and pitfalls in order to make the DIP work.

ResCap’s collapse meant it was cut off from the capital markets and faced a mountain of debt and a larger mountain of mortgages being put back to it from Ginnie Mae and private investors on representation and warranty claims. At the same time, the company’s cost of operations was ballooning as mortgage defaults rose. The biggest drain on liquidity was meeting obligations to make advances to cover certain shortfalls to investors in mortgage pools.

As Barclays stepped in those advances became the key to a new financing package. The bank was already sole lender on an existing US$468m facility and comfortable lending against the assets, which are repaid on a priority basis, making loans against the stream – up to a percentage – relatively safe.

ResCap chief financial officer Jim Whitlinger said the company met with multiple advisers and the financing approach proposed by Barclays was the most beneficial to the estate by far. “It was the most creative and the least cumbersome solution,” Whitlinger said.

The resulting DIP – a US$200m revolver, a US$1.06bn A1 Tranche and a US$200m A2 Tranche – was a hybrid that combined a leveraged loan using securitisation technology on an asset class that is barely understood, for a company that is facing intense regulatory scrutiny around its mortgage business. Both tranches flexed tighter. 

“We were able to get comfortable with the cost of financing – other banks we looked to bring in were not,” said Mark Shapiro, Barclays’ head of global restructuring and finance.

Barclays was able to get ResCap a liquidity lifeline at funding cost of roughly 6% – 300bp better than other deals the company looked at.

“These are somewhat esoteric assets,” Shapiro said. “This was not your traditional inventory receivables ABL-type lending.” To complete the loan, Barclays would draw on the resources of its leveraged finance team, its syndicate desk, its securitised product group and the FIG team.

In addition to the private label servicing advance rights, the DIP is backed by a portfolio of whole loans.

Barclays decided to structure the loan as a leveraged loan and not a securitisation one because of where the natural buyer is for this type of product. It was able to bring in both leveraged loan investors that were getting access to investment-grade collateral, which they do not normally have, and some high-grade investors that typically never buy DIP paper but crossed over for this deal – more than 100 in all.

Barclays’ previous position was taken out with the new DIP, as was a US$250m repo facility. The collateral freed up from repaying the facilities became part of a US$1.67bn first-lien collateral package. The DIP, which sat along five secured DIP-like facilities in ResCap’s capital structure, would take a second lien on another US$1.47bn in collateral, bringing the total collateral package to US$3.14bn. With the DIP, including the US$200m revolver, ResCap had access to more than US$1.1bn.

The highly structured DIP has 40 different events of default. Part of the package of protection Barclays offered investors in the DIP was to guarantee that a sales process would take place and a buyer would be in place before the first draw.

That made it effectively a bridge loan that gave ResCap breathing room to run a process to sell it assets at the best price. Eventually, it sold the servicing rights and whole loans in separate deals for US$4.5bn.

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