ANALYSIS-Buffett's ResCap bid gives him bond upside too
(This is a repeat of a story originally published on July 27.)
* Berkshire a significant holder of ResCap paper
* Investor thinks auction bid a play to boost recovery
* Licensing could be an issue if Berkshire wins
July 27 (Reuters) - Warren Buffett's Berkshire Hathaway (BRKa.N) is bidding on a bankrupt mortgage lender that it may not want, in what some investors and observers view as an effort to make more money on Berkshire's stake in the company's bonds.
Berkshire has made two bids for Residential Capital, the bankrupt unit of Ally Financial GKM.N that makes loans and collects payments on them. Both bids were topped by Nationstar Mortgage Holdings (NSM.N), which also makes and services loans. An auction for the unit is due to start this fall.
ResCap’s parent, Ally Financial, was previously known as General Motors Acceptance Corp and was once the auto lending arm of what is now General Motors Co. (GM.N).
ResCap was a major subprime lender that became an albatross for GMAC when losses ballooned during the financial crisis. Ally wants to shed ResCap’s mortgage liabilities as it seeks to repay government bailouts.
Many believe Buffett will buy ResCap if it has to, but would rather drive the price higher for Nationstar. For one thing, Berkshire Hathaway lacks the licenses needed to make mortgage loans. For another, Buffett often shies away from acquiring financial companies outside of the insurance business.
But Berkshire Hathaway has much to gain from pushing Nationstar to bid more. Berkshire owned more than $900 million of ResCap junior secured debt as of June, representing more than 40 percent of the total outstanding for that class.
Going into the bankruptcy, when Nationstar was bidding $2.4 billion, media reports suggested the secured holders could get 93 cents on the dollar. But the more Nationstar pays, the more money Berkshire Hathaway gets.
In fact, with the higher offer from Nationstar, secured bondholders are expected to be paid back in full, according to one person involved in the restructuring. Even unsecured creditors are likely to make some recovery, the person said.
Berkshire has repeatedly declined comment on its intentions for ResCap, and Buffett's assistant did not return messages for comment on Thursday and Friday.
To outsiders, Buffett's strategy makes perfect sense.
"The worst-case scenario is he owns it and he'll just hold onto it," said Michael Yoshikami, chief executive of Destination Wealth Management, an asset manager in California that has more than $12 million in Berkshire Hathaway stock.
"The best-case scenario is he extracts a higher bid and that helps him on the debt side," Yoshikami said. "I think it's one of his brighter moves."
Buffett still likes a good deal, and he invested in financial companies like Bank of America Corp (BAC.N) and Goldman Sachs Group (GS.N) when there was money to be made. He is also separately bidding on a loan portfolio that ResCap is selling and is the lead bidder for that asset.
But the licensing hurdle is big. In a court filing in June, a banker advising ResCap said one of the advantages of the Nationstar offer was its support from Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), the government-controlled housing finance providers that own the majority of the loans serviced by ResCap, and that it holds the state licenses needed to run the new assets.
Berkshire executive Ted Weschler, in a June court hearing, conceded the company did not have the housing agency support or state licenses lined up, but said, "We’ll do our absolute best to get those approvals."
Many of the court filings have been made by Weschler, an investment manager who joined Berkshire this year to help Buffett run its portfolio.
Both Nationstar and ResCap declined to comment.
ResCap is now selling the loan portfolio and the servicing business as separate entities, though the sale processes are running at the same time.
Bids for both the loans and the servicing platform are due on Oct. 19, and an auction is set for Oct. 23. A bankruptcy court hearing at which the judge would then rule on the sales is set for Nov. 5.
Berkshire is the designated initial bidder for the loan unit with an offer of $1.44 billion. The investment fund Lone Star said in June it was also interested in that unit.
ResCap filed for bankruptcy in May, with more than $5 billion of liabilities and $15 billion of assets.
The case is In re: Residential Capital, U.S. Bankruptcy Court, Southern District of New York, No. 12-12020.
(Additional reporting by Rick Rothacker in Charlotte, North Carolina; Editing by Edward Tobin and Leslie Adler)
((Ben.Berkowitz@thomsonreuters.com)(+1-617-856-4334)(Reuters Messaging: email@example.com)(Twitter: @BerkowitzRtrs)) Keywords: ALLY RESCAP/BUFFETT
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