In an interview with Automotive News, Ally Financial CEO Michael Carpenter revealed that breaking free from its troubled ResCap mortgage subsidiary once and for all is beneficial for the Ally auto lending franchise in several ways. In addition, Chrysler Group and GM dealers in the United States could also benefit from Ally's move to divorce the mortgage unit.
On Monday, Ally filed for Chapter 11 bankruptcy protection for ResCap along with a long list of related units in U.S. Bankruptcy Court in New York. Ally is the former GMAC subsidiary of General Motors, specializing in dealer floorplan financing and vehicle loans. The U.S. Treasury owns 74% of the company after a $17.2-billion government bailout.
The separation of Ally from its troubled unit will benefit the company's credit rating, the CEO disclosed. As an independent vehicle finance and online banking franchise, the company is anticipated to achieve a more favorable credit rating, and therefore a lower cost of funds.
It can pass those savings on to its clients, expand its margins, or some of each. Ally can also benefit in terms of holding an initial public offering, which has been a tough sell for the company considering the large and undefined debts on its head due to the troubled ResCap.
An IPO would increase financing for the car franchise. It can also make it more convenient for the U.S. government to put all or part of its 74% share up for sale. Moreover, Ally can also gain capital investment benefits.
The shaky status of ResCap contributed to Ally failing a recent government "stress test" which is made to determine if the company has sufficient funds to survive a downturn. Divorcing ResCap frees up the capital which parent company Ally would be willing to put into ResCap. This additional capital can then be invested into the auto franchise. [source: Autonews]