--Company posted a profit of $1.45 billion profit because of
improved performance and tax benefits
--CEO: Company will fight ResCap creditors over settlement
--CEO: Company working on a plan to address Treasury's preferred
stock holdings
(Updated with details about ResCap bankruptcy in paragraphs five
through eight, CEO comments about repaying Treasury Department in
paragraphs 13-14, details about GM and Chrysler loans in paragraph
21 and new details throughout.)
By Andrew R. Johnson
Ally Financial Inc., the government-owned auto lender formerly
known as GMAC, swung to a fourth-quarter profit on tax-related
benefits, moves distancing itself from the mortgage business and
improving performance in its core auto-financing unit.
The company swung to an overall profit of $1.45 billion from a
loss of $206 million a year earlier. Core pretax income, which
reflects continuing operations before taxes and certain expenses,
was $19 million compared with a loss of $172 million a year
earlier.
The Detroit-based company has been working to shed noncore
assets and sever ties with its mortgage subsidiary, Residential
Capital, so it can focus on its U.S. auto-lending franchise and
online banking unit.
Ally announced deals last year to sell businesses in Mexico,
Canada, Europe, Latin America and China--transactions that
ultimately could raise $9.2 billion in proceeds--in an effort to
get out from under government ownership. In May, ResCap filed for
Chapter 11 bankruptcy, a move that could eliminate for Ally
billions of dollars of liabilities related to soured mortgage
securities.
That move has also come with new challenges, though, as some
bondholders and insurers fight Ally over how much the company is
offering to pay to ResCap's estate to settle outstanding mortgage
claims. Ally has offered to contribute $750 million to ResCap in
return from a release from legal liabilities, though some of the
mortgage subsidiary's creditors argue Ally should be on the hook
for a larger amount.
The creditors say Ally stripped ResCap of value assets prior to
the mortgage unit's bankruptcy and has essentially controlled
ResCap to its benefit, despite Ally's claims that the two companies
were operated as separate entities.
Ally Chief Executive Michael Carpenter vowed Tuesday to fight
such critics.
"We are extremely confident that such claims are completely
without merit," Mr. Carpenter said during a conference call, adding
that Ally won't "be held to a ransom payment" by ResCap creditors
and will "go the litigation route" if necessary.
Overall, steps taken last year have already put Ally in a
stronger financial position, executives said Tuesday.
The company is seeking to slim down in hopes of paying back the
U.S. Treasury, which owns a 74% stake after injecting $17.2 billion
in federal funds in the company during the financial crisis.
Ally has said it plans to use proceeds from sales of its
international businesses to pay back the government. Last week,
Ally said it closed on one deal--the sale of its Canadian auto
lending and deposit businesses to Royal Bank of Canada (RY)--that
generated $4.1 billion for Ally.
The company expects sales of a Mexican insurance business to
Swiss insurer Ace Ltd. (ACE) and European, Latin America and China
operations to GM to close this year.
A chief goal on Ally's to-do list this year is repaying the
Treasury Department, Mr. Carpenter said. The company is currently
"working on a deal" to address "in the near future" mandatorily
convertible preferred stock, or MCP, in Ally held by the Treasury.
The Treasury in 2010 converted $5.5 billion of Ally preferred stock
into common stock, increasing its stake in the company to 74%. The
Treasury currently holds $5.9 billion of convertible preferred
stock.
After proceeds from international sales are collected, its
"first priority" will be to "deal with the MCP," Mr. Carpenter
added, noting that such an action would involve input with the
Federal Reserve.
A spokesman for the Treasury Department didn't immediately
respond to a request for comment on Tuesday.
The company's fourth-quarter profit was affected by several
charges, including $94 million in pension-related expenses, $148
million prepayment of Federal Home Loan Bank debt and $46 million
in legal fees and other costs tied to ResCap's bankruptcy and
international business sales. It also recorded a $1.3 billion
release of a tax valuation allowance.
Ally said profit in its auto-finance business increased to $371
million from $285 million. It posted $8.9 billion in U.S. auto-loan
originations, down from $9.2 billion, though its leasing volume
increased to $2.1 billion from $1.3 billion.
Ally has been trying to improve its share of leasing volume as
well as loans for used-car purchases to diversify beyond General
Motors Co.(GM) and Chrysler Group LLC, its two largest customers.
Ally's relationship with both auto manufacturers has been in flux
as contracts to provide key financing services face changes in the
coming months.
Chrysler notified Ally last year that it planned to let lapse a
financing agreement the companies have after it expires April 1,
2013. The agreement covers so-called "subvented loans," or consumer
loans that are offered at special rates to customers and subsidized
by Chrysler.
Ally also has a special arrangement with GM that is set to
expire at year end, though the lender has stressed that it already
competes for business with both manufacturers against other banks
that also provide auto financing through the manufacturers'
dealers.
The company noted its reliance on subvented loans has declined
substantially, thanks to deals struck with other manufacturers and
efforts to increase lease and used loan originations. Subvented
loans through GM and Chrysler accounted for about 19% of Ally's
U.S. loan originations in the fourth quarter, down from about 27% a
year earlier.
Aside from international sales, Ally is also in the process of
selling a $122 billion mortgage-servicing portfolio held at its
bank subsidiary. Ocwen Financial Corp. (OCN) and another company
are bidding on the portfolio, a person familiar with the matter
said last week.
Ocwen and Walter Investment Management Corp. (WAC) last year won
the mortgage-servicing assets of ResCap as part of a bankruptcy
auction. That deal will generate $3 billion for ResCap's estate,
while a separate auction of home loans won by Berkshire Hathaway
Inc. (BRKA, BRKB) will generate $1.5 billion for the mortgage
unit's creditors.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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