By Peter Rudegeair and Jessica Toonkel
NEW YORK, Jan 2 (Reuters) - Demand for Ally Financial’s shares has been ramping up, with investors paying increasingly high prices in recent private transactions that signal the U.S. government could be able to sell its remaining stake in the auto lender this year, sources familiar with the situation said.
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 Nov. 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 Dec. 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.
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.