DETROIT (AP) - Residential Capital LLC, a perpetually troubled mortgage subsidiary of government-owned Ally Financial Inc., has filed for bankruptcy protection.
The filing early Monday will separate the money-losing operations of Residential Capital, or ResCap, from Ally's auto loan and banking businesses, allowing them to grow and speed up repayment of Ally's government bailout from 2009, Ally said in a statement.
Ally, which is 74 percent owned by the U.S. government, was the financial arm of General Motors Co. until the banking industry meltdown in 2008. It needed a $17.2 billion bailout to survive the downturn, and it still owes the government about $12 billion. The government is hoping to get the rest of the money back through an initial public stock offering by Ally or the sale of its remaining businesses.
"We believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial," Assistant Treasury Secretary Timothy Massad said in a statement.
ResCap is a separate company, and the government does not hold any debt or equity in it, the statement said. ResCap has reached agreements with its key creditors for a speedy bankruptcy. But Ally has to provide $150 million for bankruptcy financing and pay $750 million to ResCap to make the deal work.
Ally said in a statement Monday that it also is exploring the possible sale of its international operations, a move that also should help strengthen its balance sheet. ResCap has struggled to make payments on its heavy debt ever since the bottom fell out of the U.S. housing market in 2007.
Ally makes loans to GM customers and finances dealer inventories. The government first bailed out the company, then known as GMAC Inc., in late 2008 as part of the Bush administration's aid to the auto industry. The Obama administration provided additional funding in May and December 2009.
In regulatory filings before the bankruptcy, Ally said that deterioration in the U.S. housing market has led to fewer sources of money for ResCap, which is highly leveraged due to mortgage defaults.
ResCap's net worth dropped below limits required by its loan agreements in the fourth quarter of last year, but it was saved because Ally forgave some of the debt that it was owed by ResCap. But Ally said in its most recent quarterly filing with the Securities and Exchange Commission that it may not help ResCap anymore.
ResCap also is close to defaulting on a $20 million interest payment that was due on April 17. The payment, on $473 million in unsecured loans, can be made within 30 days of the due date, but it doesn't look like ResCap can pay.
"ResCap has significant additional near-term interest and principal payments on its outstanding debt securities and credit facilities," Ally said in the filing.
The mortgage unit remains heavily reliant on Ally for funding "and there can be no assurance that Ally or its affiliates will continue such actions," the filing said.
ResCap also owes Ally roughly $1.9 billion, with $500 million of the debt unsecured. Ally said in the filing that may lose the money it loaned to ResCap if it files for bankruptcy.
Detroit-based Ally anticipates taking an approximately $1.3 billion charge in the second quarter related to the ResCap filing.