16 September 2010

GM's IPO Shows Ally Could Afford to Repay $17 Billion Bailout


Ally Financial Inc., the recipient of more than $17 billion in U.S. aid, may be able to repay its bailout in full with a profit for taxpayers if General Motors Co. is right about the value of its stake in the auto lender.

GM, Ally’s former parent, pegged the value of its 6.7 percent holding at $1.14 billion, according to a prospectus for the automaker’s initial public offering. That implies a $17 billion price for all of Ally’s common shares and would make the 56.3 percent U.S. stake worth $9.6 billion. Taxpayers could come out ahead if the government sells its $14.1 billion of preferred securities in Ally, formerly known as GMAC Inc.

“The valuation of the equity looks realistic,” said Kirk Ludtke, senior vice president for CRT Capital Group LLC in Stamford, Connecticut. “They’re getting close” to being able to fully repay the bailout, he said.

Ending U.S. assistance could ease pressure on President Barack Obama, who’s facing calls to withdraw support from the private sector, and let Detroit-based Ally shed the stigma of a government bailout. The Congressional Oversight Panel, which acts as a watchdog for the Troubled Asset Relief Program, predicted a $6.3 billion to $10 billion shortfall from Ally last March, saying the government may “squander” bailout funds.

Chief Executive Officer Michael Carpenter, 63, has said an IPO could happen as early as next year. GM’s offering may come in November, people familiar with the matter have said.

Ties to GM

Ally was the in-house finance arm of Detroit-based GM under the GMAC name. The unit was sold to a private-equity group led by Cerberus Capital Management LP in 2006. The company almost collapsed after subprime loans made by the Residential Capital mortgage unit soured. Ally, which is still the primary lender to dealers at GM as well as Chrysler Group LLC, benefited from three U.S. bailouts totaling $17.2 billion.

“Treasury’s consistent goal has been to protect the taxpayers’ investment,” David Miller, the chief investment officer at the Treasury Department’s Office of Financial Stability, said in a statement. “We expect that management will continue to build on the progress they have made thus far.”

Ally bolstered its funding by attracting deposits to its Internet bank, using above-average interest rates and an advertising campaign that shows competing bankers cheating little children. The company has been profitable this year after a loss of more than $10 billion in 2009.

Ally’s five-year credit-default swaps, which insure investors against bond defaults, fell 10 basis points to 430 basis points today, the lowest level since Aug. 10, according to data provider CMA. A basis point is 0.01 percentage point.

Possible Shortfall

GM’s calculations of Ally’s value match the estimate of Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California, who said the lender is likely to command a market capitalization of $17 billion to $20 billion. The low end could vault Ally into the ranks of the 10 biggest U.S. commercial banks.

In addition to its common stake, the Treasury holds $11.4 billion in preferred shares convertible into common and $2.67 billion of trust-preferred securities. On top of that, the government has received $1.63 billion in dividends, according to a Sept. 10 report from the Treasury. Cerberus’s 14.9 percent stake in Ally is worth $2.54 billion, according to GM’s filing. Tim Price, a spokesman for Cerberus, declined to comment.

Ally’s repayment could fall short if GM’s stock sale isn’t well-received, analysts said. The automaker will try to raise as much as $16 billion in what would be the second-largest IPO in U.S. history behind Visa Inc., which raised more than $19 billion in 2008.

Too Soon

“The GM offering is critical,” said David Menlow, president of Millburn, New Jersey-based IPOfinancial.com. “You could see a shaving off of between 15 to 20 percent on the valuation of Ally” if the GM IPO goes poorly, he said.

CreditSights Inc. analyst Adam Steer and Kathleen Shanley, a senior bond analyst at Gimme Credit LLC in Chicago, said it’s too early to place a value on an Ally IPO. The lender’s success at transforming into a deposit-based bank and the end to losses tied to home loans are still unproven, they said.

“Ally faces unique issues such as the resolution of its ResCap business, as well as funding and regulatory challenges over the next few years,” Shanley said in an e-mail. Losses at ResCap exceeded $10 billion.

‘Big Player’

An IPO that places Ally in the upper ranks of banking companies “doesn’t strike me as crazy,” said Steven Kaplan, professor of finance at the University of Chicago’s Booth School of Business. “They are a big player.”

Gaskins based his analysis in part on the price paid by GM in July when it purchased subprime auto lender AmeriCredit Corp. for $3.3 billion, or about 1.4 times book value.

Over the past five years, companies paid a median of 2.05 times owners’ equity on five deals in the auto-finance industry, according to Bloomberg data. Ally reported $20.8 billion in shareholders’ equity at the end of June.

The AmeriCredit deal led Carpenter to proclaim that Ally could be worth as much as $30 billion.

“I love the AmeriCredit deal,” Carpenter said on the company’s conference call Aug. 3. “I don’t have any doubt about our ability to repay.”

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