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U.S. Boosts Ally Stake to 74% as Lender Prepares for Share Sale

Ally Financial Inc., the auto and home lender bailed out by the U.S., moved closer to shedding taxpayer ownership as the government converted $5.5 billion of preferred stock into common shares.

The swap involves almost half the government’s preferred stock and boosts its stake to 74 percent of Ally’s common shares from 56 percent, the Treasury Department said yesterday in a statement. The move, along with a planned sale of some trust preferred securities, is “designed to accelerate Treasury’s ability to exit its investment,” the government said.

Treasury officials “want to get out of their stake, that’s definitely in the cards this next year,” said Mirko Mikelic, a senior money manager who helps oversee $14 billion of fixed- income assets at Fifth Third Asset Management in Grand Rapids, Michigan. As for Ally, “it’s probably a pretty good sign that they’re able to operate as a standalone entity.”

The government is looking to recover its $17.2 billion investment tied to Detroit-based Ally as Chief Executive Officer Michael Carpenter prepares for an initial public offering. Ally, formerly known as GMAC Inc., almost collapsed during the financial crisis as defaults on its home mortgages soared and credit markets shunned its debt.

Photographer: Melissa Golden/Bloomberg

Michael Carpenter, chief executive officer of Ally Financial. Close

Michael Carpenter, chief executive officer of Ally Financial.

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Photographer: Melissa Golden/Bloomberg

Michael Carpenter, chief executive officer of Ally Financial.

The U.S. government, while planning on an IPO, would consider a private sale, said a Treasury official who spoke to reporters on condition of anonymity.

Timing of IPO

Carpenter has said an IPO could come in 2011. Treasury Secretary Timothy Geithner said in testimony this month that an IPO may occur “much sooner than we thought six months ago.”

The transaction will help the government’s exit strategy by normalizing the capital structure, a Treasury official told reporters. It will also provide assurance to potential shareholders that they won’t get diluted by a large-scale conversion of preferred shares into common, the official said.

The conversion increases the book value of Ally’s common stock to about $13.8 billion, including about $8.25 billion before the conversion, according to a Treasury official.

General Motors Co., the automaker that once owned GMAC, said in a Nov. 19 filing tied to its own IPO that its 16.6 percent stake was worth $1.04 billion. That would value the common equity at $6.26 billion as of Sept. 30. Ally is still the primary lender to GM dealers.

Ally’s Tier 1 common ratio will increase from 5 percent to about 9 percent, the official said.

Preferred Conversion

Ally “has made substantial progress in restructuring its operations and improving its financial performance during 2010,” Tim Massad, Treasury’s acting assistant secretary for financial stability, said in the statement. Ally said this week that it reached a $462 million settlement to resolve mortgage repurchase claims by Fannie Mae on $292 billion in home loans.

The preferred stock was converted at one times the book value of the tangible common equity balance as of Sept. 30. Treasury said it still holds $5.9 billion of mandatorily convertible preferred shares, down from $11.4 billion.

Treasury also owns $2.67 billion of trust-preferred securities, which it agreed to begin selling with Ally’s help “as soon as practical,” according to the statement.

The conversion leaves Cerberus Capital Management LP and affiliates holding 8.9 percent, third-party investors with 7.4 percent, General Motors Trust with 5.9 percent and General Motors at 4 percent, according to a statement from Ally.

Citigroup, AIG

Treasury also converted preferred shares as a precursor to selling common stock to exit its investment in Citigroup Inc. and expects to convert American International Group Inc. shares.

“Our ultimate goal in all these investments is to exit as quickly as possible on terms that realize the most value for the taxpayer, and this transaction will facilitate that,” Massad said in the statement.

KBW Inc., a firm specializing in financial institutions, advised Treasury in the transaction, according to the official. The U.S. hired KBW in December 2009 for advice on Ally.

Ally’s $1.75 billion of 7.5 percent notes due in September 2020 were issued at 99.116 cents on the dollar on Aug. 9, yielding 7.63 percent, Bloomberg data show. The debt traded at 100.5 cents on the dollar, yielding 7.42 percent, on Dec. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“It’s already being kind of priced into the bonds right now,” Mikelic said. “The bond prices are showing less government support and more in line as standalone company.”

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net.

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