Ally Financial Inc., the auto lender whose mortgage unit went bankrupt, may sell international car-finance and insurance operations to help repay a $17.2 billion U.S. bailout, Chief Executive Officer Michael Carpenter said.
Ally is seeking to divest more than $30 billion of assets in Canada and Mexico as well as in Europe and South America, Carpenter said in an interview. The sales may allow Ally to repay two-thirds of the government rescue that left the U.S. Treasury Department with a 74 percent stake, he said.
“They are capital-intensive and perhaps somewhat less strategic than the U.S. business,” Carpenter said yesterday before the Detroit-based firm’s Residential Capital mortgage unit declared bankruptcy and agreed to sell most of itself to Fortress Investment Group LLC. “We recognize that the U.S. Treasury would like to get repaid, and this seems to us to be a great way to get from here to there.”
Ally said in a statement today that ResCap sought court protection. The Chapter 11 reorganization for ResCap, once among the largest originators of subprime and Alt-A mortgages, is one of the biggest collapses of a home lender since Wells Fargo & Co. agreed to acquire Wachovia Corp. at the end of 2008. A Chapter 11 filing protects a company from creditors and allows it to operate while a turnaround is devised. Ally’s auto-lending and banking units aren’t affected, according to the companies.
Ally agreed to pay $750 million to ResCap to settle any claims against the parent company, such as those brought by bondholders or other third parties, Carpenter said. ResCap will be deconsolidated from Ally’s financial statements and the parent’s equity interest in ResCap will be written down to zero, according to a company statement.
The auto lender also agreed to purchase $1.6 billion of securities if others don’t, and provide $150 million in financing for ResCap while under court protection, said Carpenter, 65. Ally’s online bank signed an agreement to support ResCap’s mortgage originations until it emerges from bankruptcy, he said.
“We’re trying to get the softest landing that we can,” Carpenter said. “We felt that there was a value to us in putting these issues behind us.”
ResCap’s board voted to declare bankruptcy and arrange a sale to Fortress and Nationstar Mortgage Holdings Inc. for about $2.3 billion, ResCap Chairman and CEO Thomas Marano, 50, said in an interview. Nationstar, majority-owned by Fortress, will buy a portfolio of servicing assets, as well as a mortgage-origination unit, and business will continue uninterrupted, he said. Mortgage servicers handle billing, collection and foreclosures.
“This was not a decision we took lightly,” said Marano, who will remain at ResCap through the bankruptcy and join Fortress. “Despite everything we have been able to do we have had mounting litigation from private-label security-holders and representation-and-warranty claims. This will put us in a solid position to move forward and grow our business.”
ResCap has a preliminary agreement with a bondholder group represented by White & Case LLP and is negotiating with other claimants, said Marano, who also has served as CEO of Ally’s mortgage division. Between $1 billion and $1.2 billion in U.S.- backed loans will be left with ResCap, he said. Barclays Plc will provide $1.45 billion in financing for ResCap while under court protection, Marano said.
Freedom for Ally
The filing may free Ally from what Carpenter once called a “millstone around the company’s neck” and represents a bet that the bankruptcy and settlement between the companies will shield the parent from the subsidiary’s debts.
Carpenter has said a planned initial public offering that would help reimburse taxpayers will be delayed until there’s progress on resolving the fate of the mortgage business. President Barack Obama has vowed to recover “every last dime” of bailout money given to banks. The lender already has repaid $5.5 billion through dividends and the sale of Ally securities, Gina Proia, a company spokeswoman, said last week.
A ResCap bankruptcy is the “single most important” action that could have been taken to ensure taxpayers are repaid, and those with claims against the mortgage unit will have “absolutely no case” to go after Ally for additional funds, Carpenter said. The ResCap board agrees, otherwise it wouldn’t have voted for the settlement, he said.
“You better believe that I spent millions of dollars with major law firms trying to assess that risk before we went down this route,” Carpenter said. “It doesn’t mean someone couldn’t make a lot of noise.”
Ally and ResCap may struggle to placate creditors who haven’t settled, said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey.
“As these new parties come to the table, you can’t negotiate with them in a way that you will lose the consent you have with prior parties,” Lubben said in a phone interview. “That’ll be one of the challenges of the bankruptcy case, to bring all those people together. If they don’t agree to what other people have agreed to, you have this tricky negotiation.”
The sale of the international businesses and the bankruptcy may be completed by the end of the year, Carpenter said. Once those occur, the company will consider other plans to “create value,” he said.
General Motors Co. is interested in acquiring Ally’s international operations, according to CEO Dan Akerson. “We’re interested in it, but we’re not going to bleed to buy it,” he said today in an interview at Bloomberg’s New York headquarters.
Nationstar said the deal will help make it the largest non-bank residential mortgage servicer and one of the largest originators. Wells Fargo ranks first in both categories among U.S. banks. Fortress and Nationstar acquire servicing contracts on about $370 billion in loan balances, as well as $1.8 billion in so-called advances, Fortress Co-Chairman Wes Edens said in an interview.
ResCap’s staff of more than 3,500 services at least 2.4 million loans, Carpenter said in Ally’s statement. The deal will “preserve the existing jobs,” according to a ResCap statement. Edens said while there haven’t been any offers of employment, “a great majority” of ResCap’s people will get one.
About $450 million in equity for the purchase came from Nationstar, while Fortress, a private-equity firm, and its Newcastle Investment Corp., a mortgage-asset buyer, contributed more than $400 million, Edens said. The rest of the price will be financed, he said. New York-based Newcastle said in a statement it will acquire as much as a 65 percent stake in excess mortgage-servicing rights.
“This is the next step in the natural reorganization of the mortgage business in the U.S.,” Edens said. “The banking industry historically was dominant in the servicing business but post-financial crisis, with new capital requirements and lots of regulatory oversight and scrutiny, banks have shown less interest. It’s a new paradigm.”
The Treasury’s objective is to get out of Ally in a way that “balances speed of recovery with maximizing returns for taxpayers,” Timothy G. Massad, 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.”
Speed Against Value
The bankruptcy could end Ally’s ownership of GMAC Mortgage, which housed Ditech, the online mortgage lender that became known for television ads that pitched low rates and showed a rival exclaiming, “Lost another loan to Ditech.”
Ally, with the bankruptcy behind it, will focus on its operating units, an online bank and auto-finance business, Carpenter said.
They face increasing competition. Chrysler Group LLC, the third-largest U.S. automaker, said last month it will let expire in 2013 an agreement that allows Ally to finance a minimum percentage of vehicles with loans made to consumers at below-market rates. Chrysler is in talks with other banks about its financing needs, CEO Sergio Marchionne said Feb. 28.
The agreement covered about 5 percent of Ally’s total U.S. consumer originations in the first quarter, the lender said in an April 25 regulatory filing. It doesn’t cover other business Ally does with Chrysler dealers, such as wholesale financing, so-called standard-rate financing for consumers and leasing, according to the filing.
Ally, formerly known as GMAC when it was part of General Motors, 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.
The online bank faces competition from ING Direct USA, which McLean, Virginia-based Capital One Financial Corp. acquired this year, as well as London-based Barclays, which is starting its own Internet bank in the U.S., the Wall Street Journal reported earlier this month.