Ally Clears Barrier to IPO With Plan to Resolve ResCap Debts
Ally Financial Inc. (ALLY) moved closer to repaying a U.S. bailout as the auto lender reached agreement with creditors of its bankrupt mortgage unit.
While financial terms of the accord weren’t included in a statement today from Detroit-based Ally, the company said it will be insulated from private claims against its Residential Capital LLC mortgage arm, once ranked among the largest originators of subprime mortgages. The sum will be kept confidential until next week, when debtors are expected to support the plan in court, Ally said.
ResCap’s bankruptcy has been one of the biggest sticking points as Ally seeks to sell shares to the public and pay back a $17.2 billion taxpayer rescue received during the global credit crisis. Ally Chief Executive Officer Michael Carpenter has been selling assets to raise money and said this month that an initial stock offering remains the best option.
The accord is “a seminal moment for Ally,” Carpenter, 66, said in the statement, and will “put the issues related to the mortgage industry behind us.” The company will be free to concentrate on auto finance, where Ally said last year it was ranked No. 1 in combined sales and leasing, and its online bank.
If approved, the agreement may head off the possibility that Ally must pay billions of dollars more than it budgeted to settle ResCap’s debts, including those tied to bad mortgage bonds. New York-based ResCap filed for bankruptcy last year as defaults soared and investors demanded refunds.
“This looks like a positive development,” Mohak Rao, a Fitch Ratings analyst, said in a phone interview. “Putting the ResCap issues behind them in terms of the payment and liabilities will clear the market overhang, which has been preventing them from repaying the U.S. Treasury.”
The dispute concerns guarantees, or “representations and warranties,” given to investors on bonds backed by mortgages that ResCap created. Such bonds typically assure buyers they can get refunds if the home loans are later found to be based on faulty data about borrowers or the properties. Defaults on subprime home loans reached record levels during the credit crisis, causing hundreds of mortgage firms to collapse.
From 2004 to 2007, a ResCap predecessor issued $197.8 billion in non-agency mortgage bonds, according to Inside Mortgage Finance, an industry publication based in Bethesda, Maryland. The lender, whose brands included the Ditech online mortgage business, reported more than $14.5 billion in losses from the start of 2007 through the end of 2009.
In a regulatory filing on April 27, 2012, less than a month before ResCap filed for bankruptcy, Ally said litigation and repurchase claims could be between zero and $4 billion more than “existing accruals,” or reserves, Fitch’s Rao said.
At the time of the filing, the company proposed paying $750 million to cover such claims, in what Carpenter later called a “hostage payment.” Creditors said in a court filing that the liabilities could be as much as $25 billion. Analysts at New York-based CreditSights Inc. once estimated Ally would have to pay $3 billion.
ResCap can repay creditors using Ally’s funds plus more than $4.5 billion from the sale of a mortgage-servicing business and a loan portfolio. Creditors who have agreed to settle include a unit of MBIA Inc. (MBI), the hedge fund Paulson & Co., and a group of securitization trusts suing for losses related to bad mortgages written by ResCap, Ally said in the statement.
MBIA’s share of the proceeds could be about $600 million, Manal Mehta, founder of San Francisco-based hedge-fund firm Sunesis Capital LLC, which owns MBIA shares, said in a phone interview. The recovery is “consistent” with MBIA’s first-quarter disclosure, the insurer said today in a filing.
Chuck Chaplin, MBIA’s finance chief, said May 10 that the firm expects to recover $1 billion tied mostly to claims against Ally and Zurich-based Credit Suisse Group AG. An amended complaint in the case against the Swiss bank shows losses of more than $386 million, which would leave more than $600 million from Ally if Credit Suisse pays out at 100 cents on the dollar, Mehta said.
Mortgage bond investors represented by Houston-based Gibbs & Bruns LLP may receive another $700 million, Mehta said. The calculation is based on a similar settlement with Bank of America Corp. that compensated investors for about 8 percent of the $106 billion in loans that had either defaulted or are “severely delinquent.” Last year, ResCap granted an $8.7 billion claim that represents losses to the investor group.
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. GMAC almost collapsed under the weight of bad subprime mortgages in 2008. The U.S. took a 74 percent stake in return for a package of financial aid designed to keep credit flowing to the auto industry and preserve jobs.
Ally can now turn its attention to the IPO. The company filed to go public in 2011 before putting the idea on hold until ResCap’s fate was clear. Carpenter has said he favors a share sale as opposed to selling units such as the online bank.
“We’re very focused on what’s the exit strategy for the U.S. Treasury,” Carpenter said May 1 during the firm’s quarterly earnings review. “If I had to put money on it right now, I would say the IPO is the best alternative.”
To get there, Ally must resubmit its annual capital plan to the Federal Reserve and show how it will improve the planning process and increase its buffer against losses. The Fed rejected Ally’s submission in March, citing “deficiencies.” Carpenter publicly disputed the Fed’s findings and Ally called the central bank’s analysis “fundamentally flawed.”
Ally could convert $5.9 billion of preferred shares owned by the U.S. government into common equity to simplify its capital structure. The company said the Fed could force the conversion as one way to boost capital levels.
Ally has collected about $7.6 billion through the sale of international units, and at least another $850 million through the sale of mortgage servicing rights, or contracts to collect payments and handle billing for home loans. The firm needs regulatory approval to pass the proceeds to taxpayers.
Carpenter, who took over as CEO in November 2009 and filed for the IPO in March 2011, once predicted that an initial share sale could value Ally at $30 billion. That was before the bankruptcy and the asset sales.
The settlement doesn’t resolve claims against Ally that aren’t related to ResCap’s bankruptcy, including those brought by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp., Ally said.