General Motors Financial has made an offer for the international business of Ally, formerly its GMAC subsidiary, once the wholesale and retail financing arm of the automaker, which GM was forced to sell as it headed toward bankruptcy in 2008. Ally, was subsequently also bailed out by U.S. taxpayers with Troubled Asset Relief Program funds after it was bankrupt due to its reckless lending practices in the housing market. Ally was plagued by bad real estate investments in its ResCap subsidiary. ResCap has now sought bankruptcy protection itself and this removes it from the balance sheet of the slowly recovering bank holding company, which wants to pay back the U.S. government.
The GM bid carries some potential risks for U.S. taxpayers, which still own a large part of the company. If GM buys the international Ally businesses, it could expand lending overseas, but not without potentially hurting liquidity. GM Financial’s consolidated assets could more than double, and it could incur substantial amounts of indebtedness, including secured debt. GM Financial’s ratio of adjusted assets to adjusted equity could more than double as well. It all depends on how much GM acquires of an estimated $31 billion in assets, and then its ability to successfully run the new operations while integrating them into the larger company. There is also a question of how it would affect GM’s relationship with Ally in the U.S. on auto financing.
General Motors in a required filing with the Securities and Exchange Commission said Ally wants to sell operations in Canada, Mexico, Europe and Latin America, as the company needs to generate cash to pay back the U.S. Treasury.
The U.S. Treasury has invested $17.2 billion in Ally. Ally has paid $5.7 billion to date in dividends and proceeds related to a trust preferred securities transaction. In May, Ally announced plans that would accelerate repayment of roughly another third of Treasury’s holdings. Those plans include pursuing alternatives for Ally’s international businesses. Treasury currently holds about 74% of the common equity in Ally and holds about $5.9 billion in mandatory convertible preferred securities, which has a dividend rate of 9%.
GM Financial as well as other companies submitted bids in July. Short term it’s hard to see how this will help GM’s floundering stock price. The U.S. Treasury still owns 32% of GM common stock, acquired as part of the Obama Administration’s unpopular $50 billion taxpayer-funded bailout. Common sense would now say taxpayers should hold the GM stock in the hope that, eventually, GM’s financial performance and its stock price will improve as the economy slowly recovers. In early trading
GM is selling for about $20, well down from the $33 price of GM’s 2010 initial public offering in November of 2010. Small investors subsequently bid up GM stock – which pays no dividend – to $39 a share before reality of the company’s ongoing challenges took hold. In order for taxpayers to recoup their investment, GM stock would have to trade above $50 a share in a market strong enough for the government to sell its stake.
