Ally Financial Inc. plans $5.9 billion buyback of U.S. bailout image

Ally, formerly known as GMAC Inc., was owned by General Motors Corp. until 2006, and was part of the U.S. rescue plan, when it took a 74% stake in return for a package of financial aid designed to keep credit flowing to the auto industry and preserve jobs.

Now Ally is raising $1 billion in a private placement and said it will pay $5.9 billion in a plan to buy back preferred shares held by the Treasury Department. The actions are intended to strengthen the company’s finances as it resubmits its capital plan to federal regulators, Ally said today in a statement. The deal includes the termination of an option that would have entitled the Treasury to more common stock if the value of Ally’s shares fell below a certain threshold.

The auto lender is looking for ways to pay back the $17.2 billion taxpayer rescue received during the global credit crisis, when subprime home loans threatened to sink the company. CEO Michael Carpenter refocused Ally on its auto lending roots, and has been selling assets to raise money while exploring the idea of an initial stock offering.

“The actions announced today will clear the way for Ally to pursue the next steps to ultimately exit” the government bailout, Carpenter said in the statement.

Terms include a cash payment to the Treasury of $5.2 billion to repurchase $5.94 billion par value of the mandatorily convertible preferred shares, and $725 million to terminate the option, Ally said. The agreement requires the funding of the private placement to take place by Nov. 30 and depends on the Fed approving Ally’s revised capital plan, among other conditions.