Ally Plans $5.9 Billion Buyback to Help Lender Exit U.S.

Ally Financial Inc., the auto lender seeking to repay a U.S. bailout, is raising $1 billion in a private placement and said it will pay $5.9 billion in a plan to buy back preferred shares held by the Treasury Department.

The actions are intended to strengthen the company’s finances as it resubmits its capital plan to the Federal Reserve, Detroit-based Ally said today in a statement. The deal includes the termination of an option that would have entitled the Treasury to more common stock if the value of Ally’s shares fell below a certain threshold.

Ally is looking for ways to pay back the $17.2 billion taxpayer rescue received during the global credit crisis, when subprime home loans threatened to sink the company. Chief Executive Officer Michael Carpenter refocused Ally on its auto lending roots, and has been selling assets to raise money while exploring the idea of an initial stock offering.

“The actions announced today will clear the way for Ally to pursue the next steps to ultimately exit” the government bailout, Carpenter said in the statement.

Terms include a cash payment to the Treasury of $5.2 billion to repurchase $5.94 billion par value of the mandatorily convertible preferred shares, and $725 million to terminate the option, Ally said. The agreement requires the funding of the private placement to take place by Nov. 30 and depends on the Fed approving Ally’s revised capital plan, among other conditions, according to the statement.

U.S. Stake

Ally sold about $5.9 billion of convertible preferred shares paying 9 percent to the government as part of the rescue plan. The U.S. also received $2.67 billion in trust-preferred shares as part of the rescue which have since been sold to investors. The U.S. still owns common shares in the lender that gave it a 74 percent stake.

Once today’s actions are completed, the Treasury’s stake will consist solely of common stock and the stake will drop to about 65.6 percent, according to figures in the company’s quarterly securities filing.

Ally, formerly known as GMAC Inc., was owned by General Motors Corp. until 2006, when the automaker sold 51 percent to Cerberus Capital Management LP, a private-equity firm. The holding was later diluted by the U.S. rescue plan.

GMAC had expanded into home loans with brands such as GMAC Mortgage and Ditech, and almost collapsed under the weight of defaults on subprime mortgages, which were designed for people with the weakest credit. The U.S. poured funds into Ally to ensure that money kept flowing to the auto industry and to preserve jobs.

Stalled IPO

Carpenter, who took over as CEO in late 2009, filed a proposed initial stock offering in March 2011. The plan stalled as he wrangled with creditors of the bankrupt Residential Capital mortgage unit over how much Ally should contribute to its revival, and when the Federal Reserve rejected the company’s capital plan this March. Carpenter publicly disputed the Fed’s reasoning, while vowing to resubmit a plan that would win approval.

The company has paid the U.S. about $6.2 billion including the return of bailout funds plus dividends, and today’s actions would bring the total to $12.1 billion, according to the statement.

“Ally has made great progress in restructuring and strengthening its business in order to repay the taxpayer, and we look forward to continuing to work with the company to recover the remaining investment,” said Tim Massad, Treasury’s assistant secretary for financial stability, said in an e-mailed statement.

The cost to protect Ally debt holders from default for five years fell. Credit-default swaps tied to its debt dropped 2.5 basis points to a mid-price of 230 basis points at 11 a.m. in New York, according to McGraw Hill Financial Inc.’s CMA market tracker.

The swaps act like insurance for bondholders in case a company fails to pay its debts. The falling price reflects less concern about the possibility of a default. The contracts are down from a 2013 high of 292.5 basis points on June 24.

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