U.S. converts Ally Financial preferred stock into common shares

Ally Financial Inc., an auto and home lender bailed out by the U.S., moved closer Thursday to regaining its independence as the government converted $5.5 billion of preferred stock into common shares.

The swap involves almost half the Treasury Department’s preferred stock and boosts taxpayers’ stake to 74% of Ally’s common shares from 56.3%. The move is “designed to accelerate Treasury’s ability to exit its investment,” the department said.

The government is looking to recover its $17.2-billion investment tied to Detroit-based Ally as Chief Executive Michael Carpenter readies the company for an initial public offering. Ally, formerly known as GMAC Inc., almost collapsed during the financial crisis as defaults on its home mortgages soared and credit markets shunned the company’s debt.

Treasury officials “want to get out of their stake; that’s definitely in the cards this next year,” said Mirko Mikelic, a senior money manager at Fifth Third Asset Management. As for Ally, “it’s probably a pretty good sign that they’re able to operate as a stand-alone entity.”

A Treasury official said the transaction would help the government’s exit strategy by normalizing the capital structure. Private investors may be more likely to buy equity or debt if the Treasury has fewer outstanding preferred shares that could be converted to common stock and dilute the stakes of other shareholders.

The U.S. is planning on an IPO for the company, though the government would consider a private sale, a Treasury official said. Carpenter has said an IPO could come as soon as 2011 and Treasury Secretary Timothy F. Geithner said in testimony this month that an IPO could come “much sooner than we thought six months ago.”

The conversion increases the book value of Ally’s common stock to about $13.8 billion, according to a Treasury official.

In addition to the U.S. stake, which Ally pegged at 73.8% of the common stock, the conversion leaves Cerberus Capital Management and affiliates holding 8.9%, third-party investors with 7.4%, General Motors Trust with 5.9% and General Motors Co. with 4.0%, according to a statement from Ally.

The Treasury Department’s approach follows similar moves to exit investments in Citigroup Inc. and American International Group Inc., where the government has converted preferred shares as a precursor to selling common stock.