Monday, May 14, 2012

Rescap , Light Squared and Dewey & LeBoeuf - Two bankruptcies and a funeral.....

Ally’s Mortgage Unit, ResCap, Files for Bankruptcy

Ally's chief executive, Michael A. Carpenter.Ann Heisenfelt/Getty ImagesAlly’s chief executive, Michael A. Carpenter.
The mortgage unit of Ally Financial filed for bankruptcy on Monday morning, a move aimed at removing the lender’s biggest obstacle to its turnaround efforts.
The division, Residential Capital, sought Chapter 11 protection in federal court in Manhattan. In a news release, ResCap emphasized it would continue its daily operations without interruption, including servicing home loans.
ResCap has cast a long shadow over its parent company. The unit was considered a primary reason Ally failed the Federal Reserve’s stress test of banks earlier this year.
The mortgage division’s long-awaited filing could lift the biggest weight from Ally, which has sought to focus on its profitable bank and auto finance operations. ResCap’s filing is meant to end years of payouts, totaling billions of dollars, aimed at keeping the business afloat.
It could also allow the lender to reconsider going public, helping the federal government to shed some of its 74 percent stake. The Treasury Department injected about $17 billion into the company, previously known as GMAC, through three rounds of investments. It is still owed about $12 billion.
Timothy G. Massad, the Treasury Department’s assistant secretary for financial stability, said in a statement: “While it is unfortunate that a Chapter 11 filing became necessary for ResCap, we believe that this action puts taxpayers in a stronger position to continue recovering their investment in Ally Financial.”
The division will be kept afloat during its bankruptcy case by a $1.45 billion loan arranged by Barclays and a $150 million credit line from Ally.
“Since we are owned by the government, and our shareholders are American taxpayers, putting billions of dollars into a marginal business didn’t make a lot of sense,” Michael A. Carpenter, Ally’s chief executive, told DealBook in an interview by phone.
As part of the transaction, the Fortress Investment Group will bid more than $2.4 billion for most of ResCap’s assets, while Ally will bid for a $1.6 billion portfolio of mortgages. The two offers will essentially kick off a court-supervised auction of the mortgage division’s assets, which could ultimately raise more than the expected $4 billion in proceeds.
In an unusual move, Ally and ResCap said they had reached a global settlement of claims between the two. Under the terms of the agreement, Ally will provide its subsidiary with $750 million in cash to help the unit pay for potential legal claims.
The pact is aimed at cutting off any argument that Ally should cover legal claims at the subsidiary. The lender is expected to contend that ResCap has long operated as an independent unit, with its own board, and that the settlement should shield it from any additional payouts.
To help smooth out the bankruptcy proceedings, ResCap has reached agreements with a group of bondholders that currently owns about $781 million of the unit’s debt, as well as plaintiffs suing the business over 290 mortgage-backed securities put together by ResCap.
Ally has long identified ResCap as one of its biggest problems. The mortgage unit, formally created in 2005, became one of the biggest subprime mortgage lenders in the country and was hit especially hard by the financial crisis.
Under Mr. Carpenter, a former senior executive at Citigroup, Ally has largely rebounded by focusing on its popular online lending arm and remaining a major lender to car dealers. Last month, it reported that first-quarter net income had more than doubled, to $310 million.
Ally added on Monday that, with ResCap now in Chapter 11, it would pursue a potential sale or spinoff of its international operations, which include businesses in Canada, Europe and South America.
It is meant to generate proceeds to help pay down the firm’s obligations to the federal government. Freed from obligations tied to ResCap, Ally may be free to pursue an initial public offering, a sale to a private equity firm or some other kind of transaction.
“We are committed to repaying the U.S. taxpayer,” Mr. Carpenter said. He later added, “The company that remains will be a powerhouse.”


Falcone’s LightSquared Files for Bankruptcy

5:15 p.m. | Updated
LightSquared, a broadband wireless company that aimed to connect millions of customers in a far-reaching satellite network, filed for bankruptcy protection on Monday, as a last-minute negotiation with creditors failed to produce a deal.
The filing, made in the United States Bankruptcy Court in Lower Manhattan, was widely anticipated. Bondholders in the company had given LightSquared a deadline of 5 p.m. Monday to come to an agreement about restructuring the company’s debt. The company had already extended the negotiations twice, but failed to strike a deal before the revised deadline.

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The company’s failure to avoid bankruptcy is yet another setback to LightSquared and its major investor, the hedge fund manager Philip A. Falcone.
Mr. Falcone, whose hedge fund, Harbinger Capital Partners, made billions during the housing crisis, owned 96 percent of LightSquared’s shares. Mr. Falcone agreed to step aside as the public face of the wireless company earlier this month, as a condition of an extension on the firm’s debt agreements.
Mr. Falcone’s ambitions, backed by billions of his own dollars, were to create a broadband network that would serve a large swath of the United States and compete with the likes of Verizon and AT&T. His bet relied on the approval of federal agencies, which he initially received.
But opponents of Mr. Falcone’s plans, who included GPS users like John Deere and the United States military, lobbied regulators to keep the LightSquared network from becoming operational, fearing that it would interfere with their own. In February, the Federal Communications Commission, the main regulator overseeing wireless networks, reversed course and blocked LightSquared’s plan, dealing a blow to Mr. Falcone’s aims.
Despite LightSquared’s bankruptcy filing, the company will remain operational and plans to keep fighting for regulatory approval. In an additional filing, LightSquared said it remained “committed to finding a resolution with the FCC and the GPS industry to resolve all remaining concerns,” a process it indicated could take as long as two years. In an effort to buy more time, the company has cut costs, reduced its headcount by nearly half, and extended its debt agreements.
“Today’s filing was not an option the company embraced quickly or easily, but it was necessary to protect LightSquared against creditors who were looking for a quick profit,” Mr. Falcone said in a statement. Filing for Chapter 11 bankruptcy protection, he said, “provides the company the additional runway it needs to resolve the regulatory issues necessary to move forward.”
As of February, LightSquared held $4.5 billion in assets and $2.29 billion in liabilities, according to the filing. LightSquared’s creditors, who are owed more than $17 million in unsecured claims, include Boeing, which is owed $7.5 million, and Alcatel-Lucent, which is owned $7.4 million.
Milbank, Tweed, Hadley & McCloy is serving as general bankruptcy counsel to the company.


Dewey’s Bienenstock Discusses Law Firm’s Demise

Martin Bienenstock, a leading bankruptcy lawyer, spoke with DealBook about Dewey's downfall.Mike Segar/ReutersMartin Bienenstock spoke with DealBook about Dewey’s downfall.
For the last two months, the bankruptcy lawyer Martin J. Bienenstock has worked around the clock to try and save his law firm, Dewey & LeBoeuf.
Despite his best efforts, Dewey is now effectively defunct, as most of its partners have left for competitors and junior lawyers and staff have been let go. On Friday, Mr. Bienenstock announced he was leaving for Proskauer Rose.
Mr. Bienenstock spoke with DealBook late on Friday about the firm’s collapse from Dewey’s headquarters in Midtown Manhattan. Also participating by phone in the interview was L. Charles Landgraf, head of Dewey’s Washington office. The two served in the “office of the chairman” that was formed in March after the firm’s former chairman, Steven H. Davis, was removed from his post.

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“If you hear noise in the background, that’s the sound of boxes being packed up and moved around me,” said Mr. Bienenstock, who joined Dewey in November 2007 just after the merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae that created Dewey & LeBoeuf.
Mr. Bienenstock acknowledged that the guaranteed long-term pay contracts given to partners were at the core of Dewey’s problems. He said that at the time of the merger, Mr. Davis tried to lock in the “primary business generators” by giving the partners at both firms four-year deals.
“Then 2008 hit, and there was the first reduction in national legal business in a long time,” he said. “The firm dealt with not being able to pay the income that it wanted to pay to many partners by promising to pay it in future years as the money was earned.”
Mr. Bienenstock said that after the firm trudged through the lean years of 2008 to 2010, things were looking up in 2011. But during the second half of the year, two problems arose, he said. First, Dewey’s revenue came in short by $30 million on a revenue base of about $800 million. Second, there was some concern about the firm’s ability to renew its $100 credit line with its banks. In the hopes of getting the renewal, Dewey only drew $75 million of the $100 million revolving line.
That created a $55 million shortfall, Mr. Bienenstock said, which prevented the firm from paying its partners what they were owed.
Mr. Bienenstock emphasized that Dewey’s results were on an upward swing in 2012 when a crush of partners — concerned about the firm’s finances and their ability to get paid — started to defect.
“This made the lenders very concerned,” Mr. Bienenstock said. “We put together a new budget and slashed partner compensation by half.”
He continued: “We began becoming concerned that without changing something it wasn’t clear that we would remain a going concern.”
That is when he and Mr. Landgraf, along with the firm’s litigation chairman, Jeffrey L. Kessler, and corporate lawyer, Richard Shutran, formed a five-person “office of the chairman” along with Mr. Davis.
As it became increasingly clear that Dewey was not going to survive as a stand-alone entity, Mr. Bienenstock and his colleagues sought out merger partners to rescue the firm. They were farthest along with Greenberg Traurig, but the talks never came to fruition.
Mr. Bienenstock emphasized that the “office of the chairman” worked hard to ensure the protection of client documents and escrows, as well as provide soft landings for the firm’s employees. He noted that many of the partners who had joined other firms in the last two months had taken junior lawyers and support staff members along with them.
“As office of the chairman, we served for no compensation and we wanted to make sure we were the last ones out the door,” Mr. Bienenstock said. “The spirit of the office of the chair was not typical of a distressed environment. There’s normally a lot of anger, recriminations and negative energy. As the situation grew more negative, the desire to make the landing softer grew larger.”
Mr. Davis was removed as chairman two weeks ago after the firm learned the Manhattan district attorney had opened a criminal inquiry into his conduct. Several former Dewey partners — it is unclear which ones — presented prosecutors with evidence of potential financial impropriety.
The job of informing Mr. Davis of the firm’s decision to remove him as chairman fell to Mr. Bienenstock. He reached Mr. Davis on his mobile phone on Saturday, April 28.
“For the good of the firm we needed to assure everyone that the office of the chair should operate free of any influences that might arise from the investigation,” Mr. Bienenstock said. “I asked to him step aside.”
Mr. Bienenstock said Mr. Davis was not at all combative; rather, he expressed disappointment and said he was being wrongly accused and all his decisions were made in the best interest of the firm.
“Steve is a selfless human being who gave so much to the firm and only wanted it to do well,” Mr. Bienenstock said. “There is a lot of anger, and I think that led someone to go to the D.A. I would be surprised if he ever entered into a promise he knew he couldn’t keep on behalf of the firm.”
Mr. Landgraf said he had not decided on his next move, though he was weighing offers from several firms. For now, he is focused on the practice of law, he said.
On Friday, amid Dewey’s winding down, he said he prepared several research memorandums for his clients.
“I had to pledge to all of my clients that I was going to be available for them,” Mr. Landgraf said. “Our clients have been serviced seamlessly.”