ResCap' bankruptcy decision offers rare valuation analysis

The Chapter 11 bankruptcy of Residential Capital (ResCap), once one of the leading residential mortgage lenders and servicers, and its affiliated debtors has spawned a gaggle of claims in connection with the debtors' proposed reorganization plan. One issue—the extent to which the collateral of junior secured noteholders (JSNs) has diminished as a result of the debtors' use of cash collateral—featured in a recent decision from the Bankruptcy Court (S.D.N.Y.) and should be of particular interest to valuation professionals because few opinions have wrestled with it.

To keep their business going as debtors-in-possession, the debtors negotiated an order for consensual use of the cash collateral from their prepetition lenders, including the JSNs. In exchange, the latter secured the right to recover an adequate protection claim. Subsequently, and notwithstanding the consensual order, the JSNs argued the use of the collateral resulted in a decrease in the collateral's aggregate value from the petition to the effective date. To make their case, they presented valuation opinions from a team of four experts associated with a respected global investment bank as to the value of the debtors' various assets. The court discredited the resulting "global summary" valuation, finding the valuations were based on too many faulty assumptions.