Reuters: Bankruptcy News: Investors cheer reports Ally will dump mortgage unit

Reuters: Bankruptcy News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Investors cheer reports Ally will dump mortgage unit May 9th 2012, 20:04 By Danielle Robinson and Joy Ferguson Wed May 9, 2012 4:04pm EDT NEW YORK, May 9 (IFR) - Junk bond investors have piled into Ally Financial this week, cheered by news that the former financing unit of General Motors will cut off struggling mortgage division ResCap to save itself. Ally bonds soared as much as three quarters to a point in dollar price despite an otherwise plunging market on Tuesday, as reports emerged that the auto lender was close to clinching an agreement with ResCap bondholders on an impending bankruptcy. Ally's 8% 2031s have risen from $118.5 bid/$119.5 offered to $119.00 bid/$120.00 offered. And if the filing comes as early as Sunday, as some expect, prices could tighten further still if the break with ResCap is seen as clean -- that is, with minimal litigation. "The company could potentially achieve greater valuation once it's freed from this albatross around its neck," said Michael Collins, senior investment officer at Prudential Financial. "From a credit perspective, Ally on its own is in pretty good shape." ResCap's bankruptcy has been long in the coming. The company has secured $1.45bn of debtor-in-possession financing with Barclays, sources told Reuters this week. Ally is in talks with Fortress Investment Group to sell ResCap in a court-supervised sale. Once free of ResCap, Ally would be able to start the process of paying back the $12bn it still owes the US Treasury, which owns 74% of Ally since its US government bailout. It will also be able to resubmit a capital plan to the Federal Reserve, looking to pass the stress test it failed in the first quarter. Although bond investors expect further tightening of Ally bond yield spreads as the process unfolds, they still expect lingering litigation to keep the bonds in junk territory and trading at a premium to comparables. "It's an improving situation, but it's not out of the woods yet," said one senior portfolio manager. "The question that remains is: does (the bankruptcy) really mean that the uncertainty is gone, or will there still be some legal liabilities hanging over their heads for years to come?" said Collins. TRYING TO BREAK FREE Ally estimated in its most recent 10-Q regulatory filing that its losses on inter-company loans to ResCap could be anywhere from $400m to $1bn. There's also the possibility Ally could end up embroiled in lawsuits surrounding private label securitizations -- that is, those with no government backing -- written by ResCap before the crisis. "Ally has taken steps to formally separate from ResCap by having it as a legally separate entity," said Mohak Rao, an analyst at Fitch Ratings. "However ResCap is still a 100% owned subsidiary of Ally, so there is at least the potential of litigation," Rao said. "We expect there will be litigation to some degree." Ally estimated that ResCap's possible losses involving the PLSs and other mortgage-related claims could range from zero to $4 billion over existing reserves already set aside for the exposure. That kind of litigation, however, shouldn't stop Ally from being able to pay off the US government. "They could just list possible litigation in a prospectus as one of the risks," said one investor. "It shouldn't stop them from selling assets." Options for paying off the Treasury range from raising cash via an IPO to splitting the company in two and selling the auto-lending and online banking portions separately. The latter option sounds extreme. Ally launched the online deposit business in order to have the low cost of funding it needs to be competitive in the auto-lending business. But a split has reportedly been raised as an option by the US Treasury and some investors. Ally had a stellar first quarter, which showed a thriving auto-lending business as well as a rise in net interest margins. Although Ally has $17bn of unsecured bonds coming due in the next 24 months, analysts and rating agencies seem satisfied the company can cover it -- including $11bn due this year -- with the $24bn of liquidity it has built up. There are concerns, however, about competitive pressures going forward, as more banks jump into the business before Ally's exclusive lending agreement with Chrysler expires next year. "Ally is increasingly challenged in its core auto-lending between higher-rated banks, which can better serve prime customers due to their lower funding costs, and captive finance companies, which can better serve the marketing goals of the parent auto company," said Kathleen Shanley, an analyst at GimmeCredit. "It might make sense to sell the auto-lending part of the business back to an auto company, such as GM," she said. "Regulators won't want GM to own a bank like Ally Bank, which is why the bank would have to be sold separately." Many analysts and investors are expecting an IPO. And with so much cleaning up of old messes, Ally very likely will see a rise in its valuation. The company could conceivably pass the Fed's stress test by converting $5.9bn of mandatorily convertible preferreds it sold to the US Treasury into common equity, according to a Barclays research note. And if it can prove it can remain competitive, then there's always the long-term dream of following Ford Motor Credit back to the world of investment-grade bonds. "Ford Motor Credit is now investment-grade, and its bonds trade at 200bp over," said Prudential's Collins. "So if Ally can show the same kind of improvement, then there is still potentially very meaningful spread tightening ahead." For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide...... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook... U.S. municipal bond market report...... Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions