DBRS Places Ratings of Ally Financial Inc. Under Review with Positive Implications, at BB (low)

DBRS, Inc. (DBRS) has today placed the Issuer and Long-Term Debt ratings of Ally Financial Inc. (Ally or the Company) Under Review with Positive Implications. DBRS rates Ally’s Issuer and Long-Term Debt BB (low) and Commercial Paper R-4. Today’s action follows the Company’s announcement that it has entered into a planned support agreement with the bankruptcy estate of its former subsidiary, Residential Capital, LLC (ResCap) and with ResCap’s creditors. A likely outcome of an approval of the settlement by the bankruptcy court would be a one notch upgrade of Ally’s long-term ratings. Conversely, should the settlement be rejected by the court, ratings would likely come under negative pressure.

The rating action reflects DBRS’s view that the comprehensive plan support agreement is an overall positive for Ally as the plan includes the release of all claims between Ally and ResCap, including representation and warranty claims that reside with ResCap and all claims held by third parties related to ResCap and that could be brought against Ally, including securitization related claims. In return Ally will contribute $1.95 billion to the ResCap bankruptcy estate, as well as the first $150 million from insurance proceeds the Company expects to receive from releases in connection with the plan. Further, Ally expects to receive full repayment of its secured claims, including $1.13 billion owed under existing credit facilities. The agreement and plan are subject to bankruptcy court approval and certain other conditions.

DBRS considers the settlement as removing substantial uncertainty from Ally’s credit profile and allowing management to focus on the core auto finance business. While the costs exceed the $750 million contribution originally offered a year ago, DBRS, nevertheless, views the cost reasonable given the benefits to the Company. As a result, Ally expects to incur a $1.55 billion charge in 2Q13, as well as an increase in litigation reserves. From a capital perspective, DBRS views the settlement as manageable.

DBRS notes that Ally has substantially completed the previously announced divestures of its various international operations. The sale of these operations has generated approximately $7.7 billion of proceeds to date (80% of the total expected) and strengthened Tier 1 common capital, on pro-forma basis, by 200 basis points to 9.9%. DBRS views these sales as providing Ally with sufficient capacity to absorb the aforementioned settlement costs and maintain capital at acceptable levels given underlying earnings and the current credit performance of the auto lending and lease book. Concurrent with today’s rating action, DBRS has withdrawn the ratings on a number of Ally’s foreign subsidiaries.

DBRS comments that Ally has stated that it intends to address the remaining Mandatory Convertible Preferred Shares (MCPs) held by the U.S. Treasury, subject to regulatory approval, which DBRS would view favorably and as another step to recovery.

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

The applicable methodology is Rating Finance Companies Operating in the United States. Other applicable methodologies include Global Methodology for Rating Banks and Banking Organisations, DBRS Criteria: Intrinsic and Support Assessments, Rating Auto Finance Companies Operating in the United States and Non-Captive Automotive Finance Companies. These can be found at:
http://www.dbrs.com/about/methodologies

[Amended on June 27, 2014, to reflect actual methodologies used.]

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: Roger Lister
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 15 May 2012

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