Bond investors are turning against Ally Financial Inc., the auto and home lender majority-owned by the U.S. government, as mounting mortgage liabilities threaten its turnaround plan.
Ally's $2 billion of 8% notes due in November 2031 fell 2 cents, to 88 cents on the dollar Friday morning in New York, the lowest since May 2010 and down from 110 cents on the dollar on July 7, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. That's more than twice the average loss for high-yield debt in that period, Bank of America Merrill Lynch index data shows.
Even as Ally profits from lending to consumers, its mortgage unit faces lawsuits over faulty loans and a 50-state investigation into foreclosure practices. The Detroit company, which was renamed from GMAC Inc. after taking more than $17 billion in bailouts, decided in June to delay an initial public offering to pay back U.S. taxpayers and has more than $12 billion of debt coming due by the end of next year.
"Ally is a mess," said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, Calif. While the bank is healthy, the mortgage unit "could pull the thing down."
The lender has set aside a reserve of $829 million to repurchase faulty loans, James G. Mackey, chief financial officer, said on a call with analysts on Aug. 2. Ally is "appropriately reserved," said Gina Proia, a spokeswoman. "It is our practice not to comment on market activity," she said.
Five-year credit-default swaps on Ally Financial reached 772.3 basis points yesterday, a two-year high, according to the data provider CMA. That means it would cost $772,300 a year to insure against losses on $10 million of debt. The swaps were as low as 316.2 basis points in July.
"The market was a little ahead of itself," said Jason Hahn, an analyst at Principal Global Investors in Des Moines, Iowa, which has $239 billion of assets under management, including Ally debt. "People were anticipating an IPO, and that's been sidetracked by the dislocation in the market."
In June, Ally decided to delay the share sale, intended to raise $5 billion to $7 billion and cut the government's 74 % stake, until equity markets improved, a person familiar with the firm's thinking said at the time. Since then, the KBW Bank Index of 24 lenders' stocks has dropped 22%.
"Until the company is able to come back and say we've put this mortgage exposure behind us, it's going to be difficult for the company to have a saleable IPO," Hahn said.
Even after Ally settled some claims with Fannie Mae and Freddie Mac last year, investors remain concerned that the lender may face more liabilities at its Residential Capital unit, once one of the largest subprime lenders.
"There's a lot of uncertainty surrounding the mortgage exposure at Ally," said Manal Mehta, a partner at Branch Hill Capital, a hedge fund in San Francisco. "They seem to have glossed over the size and scope of this liability."
