Ally Said to Receive Treasury Assent on ResCap Bankruptcy
Ally Financial Inc. (ALLY), the auto lender majority-owned by U.S. taxpayers, received Treasury Department approval for plans to put its Residential Capital unit into bankruptcy, an Obama administration official said.
The Treasury will support directors at Ally and ResCap if they decide that seeking court protection from creditors is the best course, said the official, who asked for anonymity because the arrangements haven’t been made public. The approval is conditioned on a review of final terms, the person said.
Chief Executive Officer Michael Carpenter is searching for ways to repay federal bailouts exceeding $17 billion that left the U.S. with a 74 percent stake. Administration officials have concluded that addressing ResCap’s mortgage losses will put taxpayers in a better position to recoup their investment in Ally, the person said today.
“Treasury wants its money back,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “This sign-off is an indication that Ally has a good enough plan to prove they can eventually pay back the government. The only feasible opportunity for them to get their money back is to split up or sell Ally.”
Carpenter, who once predicted that a pending initial public offering could value Ally at $30 billion, later said the sale won’t happen until there’s progress on resolving the mortgage unit. Detroit-based Ally, formerly known as GMAC, confirmed last month that ResCap is considering bankruptcy and said Ally’s loss tied to the action could be $400 million to $1.25 billion.
Matt Anderson, a Treasury spokesman, and Gina Proia, a spokeswoman for Ally, declined to comment.
Ally’s first-quarter profit more than doubled from a year earlier as mortgage results improved. Net income climbed to $310 million and profit in mortgage operations, run by Thomas Marano and which include ResCap, almost quadrupled to $191 million. ResCap’s deficits had helped drive the unit’s loss to about $792 million in the three previous quarters combined.
Earlier this year, Treasury officials told Ally that an IPO is unlikely, and they were pushing the firm to split into at least two pieces, people familiar with the matter have said. One part could be Ally’s auto-finance subsidiary, which is among the largest in the U.S., and the other would be its online bank, which had almost $28 billion in retail deposits at year-end.
All options including the IPO or sale of business units remain open, the official said.
“Treasury doesn’t want to be viewed as actively managing the business,” said Kirk Ludtke, an analyst at CRT Capital Group LLC, the Stamford, Connecticut-based broker-dealer. Still, he said, “you need to have Treasury on board.”
Ally ranked No. 1 in financing U.S. consumer auto sales for 2011 with more than $40 billion in contracts for new or used cars and trucks, or about 1.5 million vehicles. ResCap was one of the largest originators during the housing bubble of subprime and Alt-A mortgages until record defaults led to billions of dollars in losses.
Rescap’s $2.12 billion of 9.625 percent notes due May 2015 rose 0.3 cent to 94.3 cents on the dollar at 4:42 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt, which has risen from 56.9 cents in November, yields 12 percent.
Ally’s $932.5 million of 8 percent bonds maturing in November 2031 climbed 0.5 cent to 115.75 cents on the dollar at 1:26 p.m. in New York. The company had about $101.6 billion in debt outstanding at the end of 2011, according to its annual filing. Ally employed 14,800 workers at the end of December, the company said.
There are no publicly traded shares in Ally. Minority stakes include 9.9 percent held by a trust for General Motors Co. (GM) and 8.7 percent owned by Cerberus Capital Management LP, the New York-based investment firm. GM was GMAC’s parent until 2006, when Cerberus engineered a buyout. Cerberus then lost control and its stake was diluted in the bailout that began in 2008.
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