DBRS Places Ally Financial Inc.’s BB (low) Long-Term Ratings Under Review -Developing

DBRS, Inc. (DBRS) has placed the ratings of Ally Financial Inc. (Ally or the Company) and certain related subsidiaries, including its Issuer and Long-Term Debt rating of BB (low), Under Review Developing. Today’s rating action follows the decision by Ally’s wholly-owned mortgage subsidiary, Residential Capital, LLC (ResCap) to file a pre-packaged bankruptcy plan under Chapter 11 of the U.S. Bankruptcy Code.

While DBRS recognizes the medium- to longer-term positives of this action for Ally, as the issues stemming from ResCap’s legacy mortgage operations will be removed allowing the Company to focus on its more profitable, less volatile core auto finance business, DBRS is nonetheless concerned that the indirect and direct costs of the bankruptcy filing may exceed the Company’s estimates of $1.3 billion. Furthermore, although certain parties have agreed to the plan and the pre-packaged plan offers a timely resolution to the legacy issues impacting Ally, DBRS notes that the plan may be altered or delayed in the bankruptcy process. DBRS will conclude its review at the end of the bankruptcy process.

As noted above, ResCap’s bankruptcy comes with some near-term direct costs to Ally. To this end, Ally expects to record an associated charge of approximately $1.3 billion in 2Q12. This charge reflects the write-down to zero of Ally’s approximate $400 million equity investment in ResCap, a $750 million cash contribution to the Chapter 11 estate to settle potential claims, and approximately $130 million related to the establishment of a mortgage repurchase reserve at Ally Bank that replaces a reserve previously held at ResCap. Positively, Ally estimates that the impact of the charge on capital will be minimal, given the associated reduction in risk weighed assets. As such, DBRS views Ally’s estimated direct costs of $1.3 billion from the ResCap bankruptcy as manageable. DBRS views the removal of the risk and volatility associated with certain ResCap businesses positively.

Concurrent with the ResCap announcement, Ally announced that it was exploring strategic alternatives for all of its international operations, including auto finance, insurance, and banking and deposit operations in Canada, Mexico, Europe, the U.K. and South America. These businesses operate independently of the U.S. businesses and thus should have no impact on the positive momentum in the U.S. business. However, DBRS sees the potential sale or divesture of the international businesses as removing a degree of diversification that benefited the franchise. International Auto Finance reported pre-tax income of $210 million in 2011, accounting for only 8% of Global Automotive Services pre-tax income. As such, DBRS sees the overall impact to the core auto finance franchise as manageable.

The current ratings consider the substantial strength of Ally’s core Global Automotive Finance franchise, the sound credit performance of the auto lending business, and the improvement in the funding profile, which continues to benefit from the growing deposit base. However, in DBRS’s view, the weakness at ResCap, and Ally’s support of ResCap has masked much of the progress Ally’s management has achieved in restoring Ally’s financial strength. Indeed, the Global Automotive Finance business reported solid results in 1Q12 with pre-tax income of $611 million, a 3% increase quarter-on-quarter on 6% growth in revenue. Evidencing the strength of the franchise, U.S. originations were 5% higher quarter-on-quarter at $9.7 billion. Liquidity remains strong with $24 billion of available liquidity compared to $17 billion of unsecured debt maturities over the next 24 months. Capital is solid with Tier 1 Capital ratio of 13.5% and tangible common equity-to-tangible assets of 6.6%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: May 16, 2001
Most Recent Rating Update: February 4, 2011

For additional information on this rating, please refer to the linking document under Related Research.