DBRS Upgrades Senior Ratings of Ally Financial Inc. to BB, Trend Stable

DBRS, Inc. (DBRS) has today upgraded the Issuer and Long-Term Debt ratings of Ally Financial Inc. (Ally or the Company) to BB from BB (low). Concurrently, DBRS has confirmed the R-4 Short-Term Instruments rating. The trend on all ratings is Stable. This action removes the ratings from Under Review with Positive Implications, where they were placed on June 7, 2013. Today’s action follows the Company’s announcement that the bankruptcy court has approved the planned settlement agreement between Ally, the bankruptcy estate of its former subsidiary Residential Capital, LLC (ResCap) estate, and with ResCap’s creditors.

As discussed in its press release on June 7, 2013, the upgrade reflects DBRS’s view that the comprehensive plan support agreement is an overall positive for Ally. The plan includes the release of all claims between Ally and ResCap, including representation and warranty claims that reside with ResCap, as well as 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. DBRS notes that on June 13, 2013, the bankruptcy court approved the full repayment of the $1.13 billion owed to Ally by ResCap under existing credit facilities. DBRS considers the settlement as removing substantial uncertainty from Ally’s credit profile and allowing management to focus on the core auto finance business.

Further, today’s action considers the notable transformation of the Ally business model to a dealer-centric model. Indeed, in 1Q13 just 16% of Ally’s originations were subvented by GM or Chrysler compared to 58% in 2009. Ratings are also supported by the improving earnings power of the core business, which generated pre-tax income, excluding repositioning items, of $207 million in 1Q13. Risk management capabilities have been strengthened and the Company maintains solid servicing capabilities, which is evidenced in recent credit performance. Improving liquidity and funding underpinned by a growing deposit franchise were also factored into the current ratings.

The Stable trend reflects DBRS’s expectations that earnings will continue to improve as the economy gradually recovers with corresponding growth in earning assets. Ratings could be positively influenced by further improvement in earnings generation underpinned by further diversification of origination volumes, and improved quality of capital. 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. Moreover, DBRS expects Ally to continue to expand its deposit base while accessing wholesale funding markets at reasonable costs. While DBRS anticipates some normalization in asset quality metrics from cyclical lows, ratings could be negatively pressured should credit costs exceed DBRS’s tolerance levels or result in the erosion of capital. Further, any material weakening in the franchise evidenced by sustained decline in origination volumes and revenue would be viewed negatively.

Also today, DBRS has replaced the Commercial Paper Rating of Ally and its subsidiary with a more encompassing Short-Term Instruments rating. Please note this action does not impact the rating level of R-4 with a Stable trend.

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 July 7, 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: June 7, 2013

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