Fitch Places Ally Financial on Stable Ratings Outlook Following ResCap Settlement

   By Andrew R. Johnson 
 

Fitch Ratings removed Ally Financial Inc. from a negative ratings watch after the government-owned auto lender reached a deal with its Residential Capital mortgage subsidiary and the unit's creditors that will help the company avoid litigation.

The ratings firm on Friday also said it affirmed Ally's long-term rating of BB- and said the company's outlook is stable.

Ally said Thursday it would pay $2.1 billion as part of a global settlement with ResCap and ResCap's creditors in exchange for a release from nearly all of the mortgage subsidiary's legal liabilities.

The settlement is intended to fend off creditors, including American International Group Inc. (AIG), MBIA Inc. (MBI) and Paulson & Co., who says Ally is responsible for an estimated $25 billion of ResCap liabilities because it fully controlled the unit prior to its Chapter 11 bankruptcy filing last year.

Ally's payment is nearly three times higher than an original offer of $750 million, which ResCap creditors balked at. The company has already reserved for the initial $750 million offer, and said Thursday it expects to take a $1.55 billion charge in the second quarter related to the new agreement as well as for an increase in its litigation reserves.

"Fitch views this charge as reasonable in context of Ally's pro-forma capital position factoring in the recent and pending sales of its international auto businesses," the ratings firm said.

Ally is 74% owned by the U.S. government after receiving $17.2 billion in bailout funds through the Troubled Asset Relief Program during the financial crisis. ResCap, once the fifth-largest mortgage servicer in the country, filed for bankruptcy in May 2012 in a move intended to help Ally separate itself from mounting litigation tied to the unit's mortgages.

Ally, the former in-house financing arm of General Motors Co. (GM), has also been selling international businesses to raise funds to repay its bailout. So far it has received about $7.6 billion of an expected $9.2 billion in proceeds from the sales.

The settlement reached with ResCap and its creditors requires approval of the U.S. Bankruptcy Court, which could take several months.

"Should this process be completed, Fitch would view it as beneficial to Ally's creditors as it would remove a significant overhang caused by exposure to ResCap's contingent liabilities," Fitch said. However, it said it could place Ally on negative ratings watch again if the agreement isn't approved.

Write to Andrew R. Johnson at [e-mail]

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