Widely predicted in numerous reports, Ally Financial reiterated the strength of its auto finance business when announcing that mortgage subsidiary, Residential Capital, decided to file for Chapter 11 bankruptcy.
Officials emphasized the decision has no impact on Ally?s U.S. auto finance arm nor its direct banking businesses.
Ally said it believes these key strategic actions are aimed at strengthening the company?s longer term financial profile and accelerating repayment of the U.S. Treasury?s investment.
Beyond the ResCap bankruptcy filing, Ally intends to launch a process to explore strategic alternatives for its international operations. Officials think these developments will enable Ally to further invest in and grow its leading U.S.-based automotive services and direct banking franchises and be best positioned to return additional capital to the U.S. taxpayer by year-end.
?The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us,? said Ally chief executive officer Michael Carpenter.
?This action, along with pursuing alternatives for the international businesses, will allow Ally to focus 100 percent of its energies on further strengthening its already leading U.S. auto finance and direct banking franchises,? Carpenter continued.
?The depth and breadth of our automotive services operation is unmatched in the industry, and we see significant opportunities to broaden and strengthen this business domestically,? he went on to say. ?In addition, our U.S. direct banking platform, Ally Bank, helps to power our auto business, and its consumer-value proposition has attracted a strong and loyal customer base in the growing direct banking segment.
?Together, we believe these businesses, which represent the core of the company, are a winning combination and will continue to deliver value for our shareholders and provide opportunities to complete the important task of repaying the remaining investment of the U.S. taxpayer,? Carpenter added.
Ally tabulated that it has paid approximately $5.5 billion to the U.S. Treasury, which has enabled the taxpayer to recover about one-third of the investment made in the company.
Upon successful completion of the announced strategic initiatives, Ally expects to have returned a total of two-thirds of the taxpayer?s investment.
Ally?s Auto Finance Success
Looking specifically at the auto side, the company?s auto finance division has enjoyed success.
Since 2009, Ally tabulated that it has provided financing for 9 million vehicles sold to more than 6,000 U.S. dealers and has assisted American consumers in financing vehicles worth almost $100 billion.
?Ally was a key part of supporting the recovery of the U.S. auto industry by ensuring that thousands of dealers and millions of consumers had access to financing during the crisis,? Carpenter said.
?We took that responsibility very seriously and take equally seriously the mission to repay the remaining U.S. taxpayer investment in full as soon as possible,? he continued.
And dealers, it appears, understand the position Ally took as General Motors and Chrysler navigated their own bankruptcy filings.
When news first began circling earlier this year that Chrysler could be seeking a new lender relationship outside of Ally, Chrysler National Dealer Council president David Kelleher recapped the financial storm the companies survived.
?I have to tell you that I?m a little biased,? Kelleher told Auto Remarketing back in February. ?Ally to me and so many dealers is a part of us. When we were at our lowest moment and there were no other banks that wanted to lend us a branch to row ourselves into the shore with, Ally was there. Part of that was by proxy; they had to be. But really the treatment we got from their executives was beyond what they were required to do, and I?m talking about a large majority of our dealers.
?We weren?t in the best shape after the time we had been through and needed help,? Kelleher added.
?I represent the entire dealer body, and I think the entire dealer body from the weakest dealer to the strongest are better served in whole by Ally and their ability to be flexible with their lending,? he went on to say.
Late last month, Ally reported a rise in auto loan orginations as part of its first-quarter financial statement.
Ally?s total first-quarter U.S. auto originations settled at $9.7 billion, up from the fourth-quarter amount of $9.2 billion. However, the figure was off from the year-ago total of $11.6 billion.
?Consumer financing origination levels in the first quarter of 2011 were driven by a significant increase in automaker incentive programs during that period,? Ally pointed out.
Ally?s loan business associated with used vehicles moved higher quarter-over-quarter, as well, ticking up to $2.6 billion from $2.3 billion.
Fueling those quarter-over-quarter loan rises was a jump of 39,000 extra contracts as Ally reported 376,000 total contracts originated during the first quarter.
The company indicated 59 percent of those loans coming out of General Motors dealers were subvented, the highest level dating back a year. Ally noted 48 percent of loans originating at Chrysler dealers were subvented, an amount flat from the previous quarter.
Details ResCap Chapter 11 Filing
ResCap filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. In connection with the Chapter 11 filing, ResCap announced it has reached agreement with certain of its key creditors, including Ally, on the terms of a prearranged Chapter 11 plan.
Officials said Ally Financial, Ally Bank and all other Ally entities are not part of the ResCap Chapter 11 cases and there will be no change or interruption to Ally?s business operations as a result of ResCap?s action.
In addition, ResCap and its origination and servicing platform are expected to operate in the normal course during this process.
Officials highlighted a key feature of ResCap?s prearranged Chapter 11 plan is proposed settlements among Ally, ResCap?s Chapter 11 estates and certain of ResCap?s creditors that provide for the release of, among other things, all existing and potential claims between Ally and ResCap, as well as a release of all existing or potential causes of action against Ally by third parties.
The settlements also contain milestones for ResCap to emerge from Chapter 11 by year-end.
Ally agreed to take certain steps to support the stability of ResCap and its leading mortgage servicing platform during the Chapter 11 cases. Those steps include:
?Making a cash contribution of $750 million to the ResCap Chapter 11 estate upon confirmation of the plan.
?Making a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages currently marked at 45 percent of UPB.
?Providing ResCap a $150 million debtor in possession financing facility.
?Supporting ResCap?s consumer lending originations during the process.
?Other arrangements to support ResCap?s Chapter 11 plan.
Officials also pointed out ResCap obtained support for its prearranged Chapter 11 restructuring from the ad hoc steering committee representing ResCap?s junior secured notes, as well as other certain noteholders and to date has affirmative support from entities holding $781 million of these notes.
In addition, the company noted institutional investors in residential mortgage-backed securities issued by ResCap?s affiliates and, at present, holding more than 25 percent of at least one class in each of 290 securitizations agreed to support ResCap?s reorganization.
These 290 securitizations (out of a total of 392 outstanding securitizations with an original principal balance of $221 billion) have an aggregate original principal balance of more than $164 billion.
The settlements reached with these creditors and with ResCap are subject to bankruptcy court approval, according to officials.
?Ally has determined that, on and as a result of the Chapter 11 filing, ResCap will be deconsolidated from Ally?s financial statements and Ally?s equity interest in ResCap will be written-down to zero,? the company explained.
Ally said it expects to record an associated charge of approximately $1.3 billion in the second quarter of 2012.? The estimated charge is primarily driven by a write-down to zero of Ally?s approximate $400 million equity investment in ResCap, the $750 million cash contribution and approximately $130 million related to the establishment of a mortgage repurchase reserve at Ally Bank that replaces a reserve previously held at ResCap.
Officials added that absent the determination by the ResCap board of directors to file for Chapter 11, ResCap would have required billions of dollars of support from its parent to meet its obligations, which would have substantially delayed Ally?s plans to repay the remaining capital investment to the U.S. Treasury.
?The decision by the ResCap board to pursue this course will best enable it to preserve more than 3,500 jobs and keep its talented workforce focused on assisting homeowners by servicing the more than 2.4 million loans in its portfolio,? Carpenter declared.
International Businesses Update
As mentioned, Ally indicated it will explore strategic alternatives for all of its international operations, which includes auto finance, insurance, and banking and deposit operations in Canada, Mexico, Europe, the U.K. and South America.
Officials insisted the international businesses represent strong franchises in each of the respective countries, and Ally?s mission in exploring alternatives for these businesses is to maximize shareholder value in a timely manner, while also protecting the interests of the dealers and automakers that the company serves.
?The international businesses operate independently of the U.S. businesses, and, as a result, strategic actions taken with regard to these businesses will have no adverse operating impact on Ally?s U.S. businesses,? officials reiterated.
Ally is advised by Evercore Partners, Kirkland & Ellis and Mayer Brown on the ResCap matters and by Citi and Evercore Partners on the strategic matters related to the international businesses.
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