Ally Financial has $24 billion liquidity, but eyes ResCap resolution

By Paul Deckelman

New York, April 26 - Ally Financial Inc. delivered what one senior executive termed "solid results" in the first quarter, including its highest income levels since mid-2010, while raising $7 billion of new financing, including $1 billion in new junk bonds.

That boosted its overall liquidity to $24 billion - which Jeffery Brown, Ally's senior executive vice president for finance and corporate planning, said was "enough liquidity to fully fund its businesses for 29 months, even under a complete shutdown in unsecured markets, and this timeline has increased from last quarter."

In a conference call Thursday following the release of the Detroit-based automotive and mortgage lender and bank holding company's numbers for the quarter ended March 31, Brown told analysts that "despite the results of CCAR" - the Federal Reserve's stress test for major financial institutions - "Ally does have very strong liquidity and capital levels."

However, he admitted the company was "disappointed" with its stress test results and acknowledged that the Fed's Comprehensive Capital Analysis and Review process "does reinforce the need to take steps to address the contingent mortgage risks" at Ally's troubled Residential Capital LLC mortgage unit, "as this was the primary factor affecting our results."

Ally taps the markets

Ally's chief financial officer, James Mackey, told participants on the call that during the quarter Ally concluded $7 billion of funding transactions, including $5 billion of asset-backed securitization transactions in the U.S. and Canadian markets, and $1 billion of unsecured bond issuance.

Ally priced a $1 billion issue of 5½% senior notes due 2017 at 98.926 in a quick-to-market deal on Feb. 9, with the bonds yielding 5¾%. It said that proceeds of the junk offering would be used for general corporate purposes, including debt refinancing.

Besides the new ABS funding and the junk issue, the company raised another roughly half-billion dollars of secured credit facility debt and an approximately equal amount of such debt from international lenders.

In addition to the $7 billion of new funding, Mackey said that Ally also renewed a total of $15 billion in existing credit facilities at both the parent Ally Financial and its Ally Bank subsidiary levels.

$11 billion 'pre-funded'

Mackey said that the company has some $11 billion in debt maturities coming due this year, including $7.4 billion at year-end owed to the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, which the FDIC used to bail out troubled lenders during the 2008 credit crunch, including Ally's predecessor entity, GMAC Inc.

But the CFO said that the company has "practically managed $11 billion in maturities coming due this year by effectively pre-funding them," in fact pre-funding all of its unsecured debt maturities for more than two years.

Besides this year's $11 billion, Ally's debt maturity profile includes $3 billion due in 2013, $6 billion in 2014, $4 billion in 2015 and $21 billion due in 2016 and later, such as the new junk bond issue.

During the question and answer portion of the conference call following the formal presentations by Brown and Mackey, the CFO told an analyst who inquired about whether Ally will do more unsecured financings like the junk deal to meet some of the upcoming maturities, or stick to secured debt, that he would not comment on any prospective mix, other than to say that "we were active in the market on one deal in the first quarter. We think there is demand for the Ally name out there, and unsecured is just one component in the overall funding strategy as we try to optimize between the bank and the parent. But we feel very comfortable with the amount of liquidity on hand and the amount of liquidity that's available to us."

ResCap remains a problem

Much of the discussion during the Q&A session focused on Ally's plans for ResCap, Ally's wholly-owned, money-losing Minneapolis-based residential lender.

Ally's chief executive officer, Michael A. Carpenter, declared that "we've been very consistent - we think that the single most important thing that we can do to preserve and enhance shareholder value is to distance Ally from the mortgage business."

Carpenter said that the company's mortgage business is "very well-run, we have terrific people - I think they've been ahead of the curve - but it is the contingent liabilities in the capital structure of ResCap that are dragging the whole company down. And we have to separate ourselves from those issues. The question is, what's the best way to do that."

Although there has been much talk in the media recently indicating that Ally is planning on putting ResCap into bankruptcy reorganization, Carpenter said: "I've argued consistently that ResCap does function as a separate company - it would be the ResCap board of directors that would make that decision, not Ally."

He said that while Ally and ResCap "have separately and together been examining strategic alternatives that range all the way from 'staying the course' and 'fighting the good fight' on contingent liability, to bankruptcy at the other end of the spectrum," ResCap's seven-member board would decide which action to take.

For instance, he said that the recent decision by ResCap to defer making a scheduled interest payment on April 17 and instead invoke the 30-day grace period was made by the ResCap board, which "informed Ally accordingly."

He said that any claims against the mortgage lender "are contractual obligations of ResCap, not of the parent," that is, Ally. He said that "every transaction that has taken place between the parent and the subsidiary has taken place on an arm's-length basis, with professional and fairness opinions."

Ally a ResCap creditor

Ally has extended considerable credit to ResCap through intercompany loans totaling $2.6 billion that were scheduled to come due on April 13. According to regulatory filings, this consisted of $1 billion of senior secured credit facilities that were fully drawn at the end of 2011 and a $1.6 billion line of credit, including $1.1 billion in secured financing - $235 million of which had been drawn at the end of the year - and another $500 million in unsecured financing that would become available when the secured portion was fully tapped.

Ally elected to extend the maturity of the $2.1 billion of secured financing to May 14, according to a filing, while choosing not to renew the undrawn $500 million unsecured credit line.

Brown said on the conference call that the decision to not renew the $500 million unsecured line is "along the lines of continuing to reduce risk there. [Ally renewed] just the two secured facilities that are outstanding, and we feel very good about the collateral and very good about our position."

Carpenter added that "our view on that loan is, that loan is absolutely at the top of the pile from a security interest point of view, so we do not see a financial risk there."

He declined further comment on the ResCap situation.

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