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 Ally Financial has been hoping to go public since at least 2011. But
until now, investors were spooked by the problems that forced it to
seek some $17 billion in government bailouts during the financial
crisis, including bad home loans at its Residential Capital subprime
mortgage unit.
As Residential Capital gets ready to emerge from bankruptcy, hedge
funds have grown increasingly comfortable that Ally's problems have
cleared up and have bought the company's shares in two private
transactions. The deals signal that the government, which still owns
around 64 percent of Ally, may also find good demand for its shares
in public markets.
Even if it does not, it may be able to sell its shares to private
investors, bankers and company executives said.
"There might well be enough demand in the private market to take
Treasury out in whole," Ally Chief Executive Michael Carpenter said
on a November 5 conference call with analysts.
An Ally spokeswoman declined to comment.
The U.S. Treasury is open to winding down its remaining investment
through an IPO, another private placement or through asset sales, a
department spokesman wrote in a December 30 blog post on the
Treasury's website.
To be sure, Ally faces headwinds. It is harder for the former
General Motors Co lending arm to win business now that it no longer
has special agreements to be the preferred lender to customers of
Chrysler Group and GM. It has been increasingly relying on used car
loans and subprime car loans, which tend to have weaker credit
quality, to generate profit growth.
The outcome of a few other financial services' IPOs expected early
next year may determine how successful an Ally public offering might
be, bankers said. Santander's U.S. consumer finance business and
General Electric Co's spin-off of its credit card unit will likely
come to market early in 2014, and Ally may wait to see how they fare
before proceeding with its own IPO, said one industry banker.
Private market investors appear to be optimistic about Ally's
prospects. Ally sold $1.3 billion in unlisted shares to private
investors in November for an average price of around $6,000 per
share, and weeks later GM sold its remaining 8.5 percent stake in
Ally for around $6,800 per share.
Before the November transaction, Ally had talks with at least one
private equity firm about selling shares at a fairly big discount to
their book value, a source familiar with the situation said. But
hedge funds then unexpectedly bid up the shares, allowing Ally to
fetch a valuation closer to its book value, the source said.
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The hedge funds "opened the flood-gates, and people saying 'I will
write a check for $6,000 a share," the source said. "There is a
subset of investors buying into the notion that there is a brighter
future for Ally."
Between the November and December private transactions, a federal
judge approved the plan of Residential Capital, which Ally put into
bankruptcy in May 2012, to exit Chapter 11 before the end of the
year. To many investors, that signaled that the company had cleared
up one of its biggest problems. Standard & Poor's and Fitch raised
Ally's credit rating on the news, contributing to the higher
valuation.
Ally's bonds are rallying too — its notes due in 2020, with a 7.5
percent coupon, have risen 5 cents on the dollar to 117 cents on the
dollar since August, according to bond reporting system Trace.
The company's profitability should improve as it continues to cut
its funding costs, said Jody Lurie, a corporate credit analyst at
Janney Montgomery Scott LLC. In the third quarter, Ally's cost of
funds fell 0.57 percentage point from a year earlier.
Ally received $17.2 billion in bailout money from the United States
during the financial crisis, when it was rescued as part of the
government's efforts to save the U.S. auto industry. The government
has recovered $12.3 billion of that money as Ally bought back some
shares and paid $3.7 billion in dividends and interest. It is one of
the biggest remaining investments in the government's Troubled Asset
Recovery Program bailout fund.
While Ally has some control over how it ultimately gets out from
under the Treasury's control, the bank cannot determine the precise
timing.
"The timing and the exact method of exit is completely under (the
Treasury's) control, not under our control," Ally CEO Carpenter said
on the Nov. 5 call.
(Reporting by Peter Rudegeair and
Jessica Toonkel, editing by Dan Wilchins and Dan Grebler)
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