Ally Financial Inc will sell $1 billion of unlisted shares to investors and repay taxpayers nearly $6 billion taking a big step closer to exiting U.S. government control.
With the transactions, Ally will have repaid the Treasury about $12.1 billion of the $17.2 billion taxpayer bailout it received during the financial crisis.
The former auto-lending arm of General Motors has struggled to recover from the mortgage meltdown. Last year, it put its troubled home loan subsidiary Residential Capital LLC into bankruptcy to stanch the bleeding from bad mortgages.
The company has also raised over $40 billion of retail deposits to give it a more stable source of funding, and has raised $7.7 billion by selling many of its international businesses. Nonetheless, the Federal Reserve identified Ally in March as the worst capitalized of the top 18 banks.
With the transactions announced on Tuesday, Ally will reduce the Treasury's ownership stake to around 65 percent from around 74 percent.
Ally agreed to pay $5.2 billion to repurchase the outstanding preferred securities held by the U.S. Treasury, and $725 million to terminate the Treasury's right to receive extra payments if the company sells shares below a particular price. That right was a term the company agreed to in 2010 when the U.S. converted some of its preferred Ally shares into common stock.
The company also agreed to sell 166,667 of the company's common shares to a group of investors. An Ally spokeswoman declined to disclose the investors' identity, but said they were a diverse group of existing and new shareholders.
The company's chief executive, Michael Carpenter, believes that these payments will help reduce regulatory scrutiny of his business.
Carpenter said on a July 31 conference call with analysts that Ally's losses in 2009 and 2010, along with the legacy ResCap issues and heavy government ownership, "have led our regulators to apply a substantially higher bar to Ally than to any other bank.
"We believe as we transition away from ResCap and transition away from government ownership that, in fact, the regulators will treat us in more normal terms," Carpenter said on the call.
A NEW CAPITAL PLAN
In June, a judge approved Ally paying $2.1 billion to ResCap and its creditors to resolve legal claims that it had stripped out ResCap's most valuable assets prior to putting the unit into bankruptcy. In the second quarter, the bank took a $1.6 billion charge related to the settlement, driving its $927 million loss for the period.
When the Federal Reserve called Ally the most weakly capitalized of the top banks, it objected to Ally's capital plan "both on quantitative and qualitative grounds." The bank was the only lender that failed to meet the minimum threshold of a 5 percent capital buffer in a scenario where unemployment rose to 12.1 percent and share prices fell 50 percent.
The private placement must take place before November 30. Both the placement and transactions with the U.S. Treasury are contingent on the Federal Reserve's approval of the bank's resubmitted capital plan. Ally has to resubmit its new capital plan by the end of September.
"Ally has made great progress in restructuring and strengthening its business in order to repay the taxpayer, and we look forward to continuing to work with the company to recover the remaining investment," Assistant Treasury Secretary for Financial Stability Tim Massad said in a statement.
(Reporting by Peter Rudegeair and Aman Shah; Editing by Andrew Hay and Leslie Gevirtz)