The Indianpost

Ex-GM finance arm moves closer to IPO

The former financing arm of General Motors took a step towards an initial public offering after the US Treasury said it would convert part of its stake into common stock. The Treasury said on Thursday that it would convert $5.5bn of preferred stock in Ally Financial – the new name for the General Motors Acceptance Corporation – into ordinary equity. “Ally has made substantial progress in restructuring its operations and improving its financial performance during 2010, and this transaction will position us to begin to exit the investment,” said Tim Massad, the Treasury official in charge of investments that the US government made during the financial crisis.
A conversion of preferred shares in Citigroup was a prelude to the Treasury’s sale of the common stock. A similar conversion is pending for the Treasury’s stake in AIG. The Treasury invested a total of $17.2bn into GMAC during 2008 and 2009 as part of its rescue of the US car industry. Ally has been trying to reduce the riskiness of its balance sheet. It has been profitable for the past three-quarters.
The conversion will bolster Ally’s common equity, bringing its capital ratios close in line with other banks and consumer lenders. The company’s tier 1 common ratio, a measure of financial strength, will rise from about 5 per cent to about 9 per cent. That, the Treasury hopes, will improve Ally’s ability to raise equity and debt from third party investors and should facilitate an eventual float of the group.
The Treasury’s ordinary stake in Ally will rise to 74 per cent from 56 per cent once the conversion goes through. The stake owned by private equity house Cerberus and its affiliates will be diluted to 8.9 per cent. Under the terms of the deal, the Treasury is converting its preferred stock to common at about 1 times the book value of Ally’s tangible common equity.
The government negotiated for itself a slightly better deal than that prescribed under the terms of its original investment. That would have seen the government take its common stake at about 1.1 times tangible book value. “The next logical step in our strategic plan was to begin to conform the capital structure to that more typical of a bank holding company, and the conversion of these shares is a key milestone in that effort,” said Michael Carpenter, chief executive officer of Ally.
The US government will still own another $5.9bn of convertible preferred stock. That could act as a drag on Ally’s IPO unless the proceeds were used to the redeem those preferred shares. The government also owns $2.7bn in trust preferred securities – a type of subordinated debt issued by many US banks – but said that it was aiming to sell a portion of this holding “as soon as practical”.

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