ResCap Liquidating Trust

(OTC: RESCU)

Judge Schiltz said it, They are pretty onesided contracts.

Unit Price: $14.26

Market Cap: $1.395bil

Story:

By Scott Lee, scottleeyy@gmail.com

Description
General Motors Acceptance Corp
Residential Capital (GMAC ResCap) is a
financial services company focused on
residential loans. The company held
subprime mortgages and acted as a
securitizer of residential mortgages that were
sold to the Residential Mortgage Backed
Securities (RMBS) Trusts.
In 2011, the company fell under as losses
mount for the mortgages held and having
missed an interest payment. Lawsuits also
followed for losses incurred by the RMBS
Trusts and the respective Monolines that
provided credit insurance for particular
tranches in the RMBS Trusts. Following that
in 2012, GMAC Residential Capital filed for
Chapter 11 bankruptcy protection.
Upon the confirmation of bankruptcy plan
in Dec 13, unsecured creditors (RMBS
Trusts and Monolines) were given units to
ResCap (RESCU). RESCU will act as a
liquidating trust and seek to recover
losses by suing the mortgage originators.

The Case:

At the time of securitization, the underwriters

had made Representations &Warranties
(R&W) in its contract to ResCap (incorporated
in the Client Guide). ResCap in turn made the
same R&W to the RMBS Trusts. This forms
the legal basis for ResCap against the banks.

The overall mortgage securitized then was a

total of $292.82bil. As part of the BK plan,
out of this Trust Original Principal Balance
(OPB), RESCU was entitled to recover losses
of $12.2bil. This opinion was formed under
the Sillman Examination where Frank Sillman
estimated the recoverables from the losses
incurred by the RMBS Trusts ($7.4bil low
side) and the Monolines ($3.3bil low side).
Overall, losses incurred by Pre 04 Trusts and
04-07 Trusts have different defect rates. It is
important to know the losses, the defect rates
and their probable settlement factor to gauge
RESCUs entitled litigation recovery. Sillman
estimated that of all losses incurred to date
by Pre 04 Trusts, the average defect rate was
35.1% (breached R&W). For the 04-07
Trusts, the rate was 43.5%. However 04-07
Trusts losses to date were $32.9bil out of a
total of $34.35bil (95.8%). Proportionally, the
weighted average defect rate for RMBS Trust
losses is 42.8%. Applying settlement factors
based on his experience of 41%(low) to
47%(high), damages entitled sums up to
$7.4bil to $8.7bil (accounted for future
losses). For the monolines, defect rates did
not matter and settlement factors are higher
as witnessed in Assured v. Flagstar (Jun 13)
(80%-120%). This is because the trusts
wouldnt have been insured at the tranche
level had there not been material
misrepresentations in the loan levels. Total
losses to date were: $3.4bil where damages
entitled to RESCU are $3.3bil to $4.3bil.
(accounted for future losses). Total
recoverable RMBS Trust losses: $10.7bil to
$13bil out of $292.82bil of written business.
However, to date (Feb 15), RESCU had only
sued for $43.2bil OPB out of a total
$292.82bil. Although this was up 37.1% from
an initial $31.5bil (Dec 13), it is unclear why
or whether more OPB will be brought to suit.
Nonetheless, we believe there is still value.

Particularly, in the Client Guide, per section

A210(A), if ResCap determines that an Event
of Default has occurred with respect to a
specific Loan, the Client agrees to repurchase
the Loan and its servicing. And further
Whenever any provision of this Client Guide
contract requires GMAC-RFC to make a
determination of fact such determination Valuation:
or decision shall be made in GMAC-RFCs sole LITIGATION VALUATION
Bear
Base
Bull
and absolute discretion (113(B)). This legal
DAMAGES FROM TRUST CLAIMS
Total Trust OPB in bankruptcy
292,819
292,819
292,819
strength gave ResCap full right in
Amendments/new complaints
5%
10%
20%
determining the material breach of R&W Ultimate trust OPB
45,360
47,520
51,840
% of bankruptcy OPB
15.49%
16.23%
17.70%
(Event of Default) and entitles it to the
relevant losses. The Eighth Circuit Court of Given the recent addition, new complaints
Appeal in Minnesota (MN) affirmed this right from $43.2bil are fairly reasonable given a total
of $292.82bil.
in ResCap v. Terrace Mortgage Company:
Assumed Loss Rate
10.00%
12.89%
16.10%
The Client Guide gives Residential sole
Portion of Monoline claim
227
551
1,084
discretion to determine whether an Event of
Settlement Rate for Monoclaim
60.00%
80.00%
100.00%
Portion of RMBS Trust
4,309
5,575
7,262
Default has occurred. There is nothing
Defect Rate for RMBS Trust
38.00%
42.80%
43.50%
ambiguous about this language. Also, as
Settlement Rate for RMBS Trust
41.00%
60.00%
80.00%

Loss rate are assumed in the bear case as 10%,

dropping 2.9% from the average of 12.9%
($34.35bil+$3.4bil) /$292.82bil OPB.
However, the likelihood is for losses to have
increased overtime or that lawsuits included
those of heavier losses. The monoline
proportion also assumed at 5% for bear
instead of 9% range ($3.4bil / $37.75bil) for
base. It is also assumed a pessimistic
settlement of 60% where sniff tests are at
80%-120%. The weighted average defect rate
was 42.8%. This was established for all losses
that ResCap incurred. However, more losses
from Pre 04 Trusts may be filed in the current
lawsuits even though they are only 4.2% of all
RMBS Trust losses. In the bear case, 65% of
these losses are assumed to come from Pre 04
Trusts that are filed in the current lawsuit with
a weighted average defect rate of 38%. A
settlement rate should vary from 41%,
although given the precedence set by the
Terrace case, it should be much higher (most of
these suits are in MN).
ResCap's share of claim awards
Expenses incurred
Collectability Discount
Recovery of Damages

807
46
60.00%
512

1,872
49
80.00%
1,537

3,611
53
60.00%
2,199

Pre BK expenses of ($300mil) incurred are

also recoverable as witnessed in recent
settlements. This is in proportion to the suit
trust OPB as a percentage of total OPB. On
the issue of collectability, as these banks go
under and their parent picks up the tab,
piercing the corporate veil and successor
liability may be an issue. Given the strength of
the legal suit where fraud could be established
in a strong case however, a worst case scenario
haircut of 40% should be the limit.
INTERESTS
Years of prejudgment interest
Interest rate
Prejudgment interest

4
10.00%
205

4
10.00%
615

4
10.00%
879

Prejudgment interest is another value where

the clock starts ticking at the time of BK plan.
Given the current time line of ending expert
discovery in Jul 16, it is not unreasonable to
assume by Dec 17 (4 years). Interest rate is
fixed at 10% for MN, Statutes 549.09.
TOTAL VALUE
TOTAL LITIGATION LIABILITY
Net Assets in Liquidation
Fully Diluted Units
Per Unit
Upside
Years to Distribution
IRR

717
412
97.8
11.55
-19%
4
-5.14%

2,151
412
97.3
26.34
85%
4
16.59%

3,078
412
96.8
35.73
151%
4
25.81%

With a current balance sheet value of $412mil,

the base case is where payoff based on a
conservative and not practical valuation. Also,
the investment thesis should be viewed as one
of an exponential curve with little downside
worst case.
Omitted value points:
Non-Trust Claims & Pre-bankruptcy losses.