Third Point has invested across the capital structure of Ally Financial (ALFI, Financial), the former GMAC, throughout the company's multi-year reorganization. Today's Ally Financial ("Ally") fits the pattern of other profitable investments we have made: a highly successful, nearly-completed restructuring that remains undervalued, with an explosive earnings story led by a talented management team who are economically aligned with shareholders.
We invested initially in 2011 in Ally's unsecured debt and preferred securities because we believed market estimates of potential liabilities related to the company's w holly owned mortgage subsidiary, Rescap, were excessive. When Ally stopped funding its losses through direct loans and sought to distance itself from Rescap 's b allooning potential liabilities in 2012, Rescap filed Chapter 11. After nearly one year of creditor negotiations, Ally permanently settled all mortgage related liabilities for approximately $2 billion, a figure that was consistent with our expectations. During this period, Ally initiated a radical operational restructuring that included divesting all of its international operations and their associated $30 billion of assets and jettisoning Rescap, transforming Ally into a pure-play North American auto finance company with leading market share.Â
Under normal conditions, a financial services company with $185 billion in assets undergoing a substantial restructuring would attract significant interest from investors. However, until November 2013, Ally remained 75% owned by the US government, under the terms of the Federal government bailout of General Motors during the financial crisis. With Ally's debt in struments trading above par following Rescap's bankruptcy filing , distressed players moved on to other opportunities and traditional equity investors dismissed the opportunity given the small float. Over the past six months, we have become one of Ally's largest shareholders, acquiring approximately 9.5% of the company in a series of private transactions.
Ally has announced a strategic plan to achieve increased profitability driven by improved cost of funding and balance sheet optimization, reduction in structural costs associated with divested international assets, and the easing of regulatory constraints still remaining due to the legacy Rescap relationship and government ownership. It has already begun reducing its high-cost funding structure through liability management, and recently received upgrades from S&P, Moody's , and Fitch, putting most of its debt instruments within striking distance of investment grade. The $1.3 billion primary capital raise in Q3 has strengthened Ally's capital metrics and should allow for greater future regulatory flexibility, mainly via increased funding from its rapidly growing online bank which has more than $50 billion in deposits. Last week's successful placement reduced the governmen t's holdings to 37 %. Finally, Ally recently received Fed approval for its Financial Holding Company application, a designation that will allow it to keep its competitive advantage of serving as a "one stop shop" for auto dealers providing retail and wholesale financing, insurance, and auction services.
Our confidence in Ally's ability to execute on its ambitious restructuring plan is driven by the leadership of Mike Carpenter, its talented CEO, and the company's deep management bench. In the last 12 months, Mr. Carpenter has guided Ally through one of the largest and fastest restructurings we have witnessed. Divesting $30 billion of assets on four continents and resolving a highly complex bankruptcy of a subsidiary are only the beginning of the story from this team, and we expect them to execute on their multi-year plan to significantly increase All y's earnings. Nearer-term, we believe Ally will be in a position to exit TARP with full government repayment during 2014, most likely through an IPO. Ally's underlying assets are low risk, with normalized credit losses of ~50bps and peak losses during the crisis of only ~100bps. The assets are short duration, typically 2½ to 3 years, resulting in a balance sheet that can quickly benefit from rising rates. These factors have led both debt and equity investors historically to apply low cost of capital requirements to securities backed by auto loans. We believe Ally is poised to grow its capital base and ultimately achieve a multiple significantly in excess of 1.0x book value, well above the valuation of our purchase levels.
From Daniel Loeb (Trades, Portfolio)'s Third Point fourth quarter 2013 commentary.
