Ally's mortgage unit bankruptcy could boost its auto business
CEO Carpenter wants to lower borrowing costs
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NEW YORK -- It should be good news for Chrysler Group and GM dealers in the United States if Ally Financial can divorce itself once and for all from its troubled ResCap mortgage subsidiary.
Ally announced today it filed for Chapter 11 bankruptcy protection for ResCap and a long list of related subsidiaries in U.S. Bankruptcy Court in New York.
Ally -- the former GMAC unit of General Motors that specializes in dealer floorplan financing and car loans -- is 74 percent-owned by the U.S. Treasury after receiving a $17.2 billion government bailout.
Getting rid of ResCap benefits the Ally auto lending franchise several ways, CEO Michael Carpenter, in an interview with Automotive News, said today:
• Credit rating -- As a standalone auto finance and online banking franchise, Ally is expected to achieve a more favorable credit rating, and therefore a lower cost of funds. Ally can pass those savings on to customers or fatten its margins, or some of each.
• Initial public offering -- An Ally IPO has been a tough sell, with large and undefined liabilities hanging over its head because of ResCap. An IPO would raise money for the auto franchise, and also make it easier for the U.S. government to sell all or part of its 74 percent share of Ally, dating from a government bailout in late 2008.
• Capital investment -- ResCap’s precarious status contributed to Ally flunking a recent government “stress test” designed to see if Ally has deep enough pockets to survive a downturn. Getting rid of ResCap frees up capital parent company Ally would be obliged to sink into ResCap, which can now be invested in the auto franchise.
“The way the rating agencies look at us overall, we are below investment-grade credit today,” Carpenter said in the interview.
“That includes the auto business, which is extremely strong, and ResCap, which is extremely weak from the rating agency point of view,” he said.
Even before today’s Chapter 11 filing, Standard & Poor’s had already downgraded ResCap to “Selective Default,” because it missed interest payments on one debt issue in April. S&P said earlier that resolving its ResCap issues or an Ally IPO could lead to an upgrade for the parent company.
Options for international
Ally also announced it is exploring "strategic alternatives" for all of its international operations, including auto finance, insurance, banking and deposit operations in Canada, Mexico, Europe, the United Kingdom and South America.
In the first quarter of 2012, Ally's international operations had $2.3 billion in auto originations, up from $1.9 billion in the year-ago quarter. U.S. auto originations were $9.7 billion, down from $11.6 billion a year ago.
Carpenter said Ally wants to concentrate on its core U.S. business.
“While these (International Operations) are strong, well-managed businesses, they are not as critical or strategically well positioned as the U.S. businesses. Particularly, in the context of a U.S. Treasury that wants to get paid back over time, it makes sense to realize the value of those assets,” by selling them, he said.
However, Ally is retaining its U.S. businesses including its insurance operation, which offers floorplan insurance and other commercial insurance products for dealers, plus F&I products like extended-service contracts to be retailed at dealerships.
Ally President William Muir said in the same phone interview that when all is said and done, Ally will be a standalone U.S. auto lending and online banking franchise.
“When we get done with the ResCap filing and the sale of international operations, we will be all-in in terms of the U.S. auto business,” he said. “We will have all our chips in, just the way the dealers have all their chips in.”
Bigger picture
On a broader scale, Ally is looking for ways to pay back the U.S. government for its 2008-2009 bailout.
ResCap listed more than $1 billion each in assets and debt in a Chapter 11 petition filed today in U.S. Bankruptcy Court. Chapter 11 of the U.S. Bankruptcy Code is typically used by companies that seek to keep operating, cut debt and exit court protection.
In 2010, the Treasury failed to find a buyer for ResCap, which originates and services residential mortgages. Carpenter had said an initial public offering for Ally wouldn't happen without progress on a resolution for ResCap.
ResCap's board voted to declare bankruptcy and arrange a sale to Fortress Investment Group LLC and Nationstar Mortgage Holdings Inc. for about $2.3 billion, ResCap Chairman and CEO Thomas Marano said in an interview. Nationstar, which is 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.
Ally financing
Ally will provide $150 million to help finance ResCap's operations during bankruptcy, according to a statement. The auto lender also agreed to purchase $1.6 billion of securities if others don't.
In the weeks before the bankruptcy filing, ResCap negotiated with bondholders in an effort to create a so-called prepackaged bankruptcy.
ResCap missed a $20 million, semi-annual interest payment April 17 on about $473 million in 6.5 percent notes due in 2013, Ally said in a regulatory filing. The firm had 30 days before a default occurs, according to the filing.
Carpenter and Ally's board had resisted the U.S. Treasury's call to break up and sell ResCap, people familiar with the matter said in March. Elliott Management Corp., which owns 2.3 percent of Ally, also pressed for a sale, saying in a letter to the board that a ResCap bankruptcy filing would lead to "radical value destruction."
Elliott objection
Bankruptcy would last 12 to 18 months and trigger billions of dollars in so-called put-back claims, where holders of mortgage-backed securities issued by ResCap try to force the company to buy back soured loans backing the bonds, Elliott said in the letter.
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 government-insured loans will be left in the ResCap estate as part of the reorganization, he said.
The bankruptcy plan received conditional approval from the Treasury, an Obama administration official said in early May. The U.S. concluded that addressing ResCap's mortgage losses would put taxpayers in a better position to recoup their investment in Ally, according to the official.
Dwindling assets
Assets at ResCap, once one of the largest subprime mortgage originators, dwindled to $15.7 billion at the end of the first quarter from more than $130 billion in 2006. ResCap was involved in 22 securities lawsuits, Carpenter said in November.
That month, ResCap hired Centerview Partners LLP to identify concessions that would be needed from lenders to put the company on a firmer financial footing before Ally pursues an IPO, people familiar with the matter said at the time. Ally had decided in June to postpone its planned share sale, which was intended to raise as much as $7 billion and shrink the government's stake.
Ally considered cutting off support for ResCap in 2009, according to its third-quarter report that year. GMAC hired advisers and weighed whether doing so would disrupt the parent company's access to capital markets, according to a report released in March 2010 by the panel appointed by Congress to oversee the bailouts.
Standard & Poor's rated Ally and ResCap equally at B+ until Nov. 10, when it cut ResCap's grade four levels to CCC, saying in a report that its confidence that Ally would support the unit had "declined substantially."
Bloomberg contributed to this report.
You can reach Jim Henry at autonews@crain.com.
