NEW YORK (Bloomberg) -- Ally Financial Inc., the former General Motors lending unit, moved closer to regaining its independence as the U.S. government converted $5.5 billion of preferred stock into common shares.
The swap involves almost half the Treasury Department's preferred stock and boosts the U.S. taxpayers' stake to 74 percent of Ally's common shares from 56.3 percent, according to a department statement Thursday. The move, along with a planned sale of some trust preferred securities held by the United States, is “designed to accelerate Treasury's ability to exit its investment,” the statement said.
The government is looking to recover its $17.2 billion investment tied to Detroit-based Ally as CEO Michael Carpenter readies the company for an initial public offering. Ally, formerly known as GMAC Inc., almost collapsed during the financial crisis as defaults on its home mortgages soared and credit markets shunned the company's debt.
Treasury officials “want to get out of their stake, that's definitely in the cards this next year,” said Mirko Mikelic, a senior money manager who helps oversee $14 billion of fixed- income assets at Fifth Third Asset Management in Grand Rapids, Mich. As for Ally, “it's probably a pretty good sign that they're able to operate as a standalone entity.”
Government's exit strategy
A Treasury official told reporters that Thursday's transaction will help the government's exit strategy by normalizing the capital structure. Private investors may be more likely to buy equity or debt if the Treasury has fewer outstanding preferred shares that could be converted to common stock and dilute the stakes of other shareholders.
The United States is planning on an IPO for the company, though the government would consider a private sale, a Treasury official said in an interview. Carpenter has said an IPO could come as soon as 2011, and Treasury Secretary Timothy Geithner said in testimony earlier this month that an IPO could come “much sooner than we thought six months ago.”
The conversion increases the book value of Ally's common stock to about $13.8 billion, according to a Treasury official.
Treasury will continue to own $5.9 billion of mandatorily convertible preferred shares, down from $11.4 billion before Thursday.
Treasury also owns $2.67 billion of trust-preferred securities, which it agreed to begin selling with Ally's help “as soon as practical,” according to the statement.
Current ownership stakes
In addition to the U.S. stake, which Ally pegged at 73.8 percent of the common stock, the conversion leaves Cerberus Capital Management LP and affiliates holding 8.9 percent, third party investors with 7.4 percent, General Motors Trust with 5.9 percent and General Motors Co. at 4.0 percent, according to a statement from Ally.
Treasury's approach follows similar moves to exit investments in Citigroup Inc. and American International Group Inc., where the government has converted preferred shares as a precursor to selling common stock, according to the government's statement.
“Our ultimate goal in all these investments is to exit as quickly as possible on terms that realize the most value for the taxpayer, and this transaction will facilitate that,” Tim Massad, Treasury's acting assistant secretary for financial stability, said in the statement.