In the second quarter of 2024, Ally Financial Inc. (ALLY), a bank, issues $330 million in debt but the amount it pays back depends on the performance of a $3 billion pool of auto loans. If the loans perform well, Ally pays back the debt in full with interest. If they do not, Ally pays back less. The loans are on Ally’s balance sheet, but it takes on new risks. If the loans perform well, the deal is not worth the cost. If they do not, there is a risky negotiation on the amount of Ally’s repayment. In any case, Ally is up for the first $45 million of losses on the $3 billion pool, the debt holders the next $300 million, with Ally bearing the rest.
Always raise eyebrows when you see the words, structured finance.
Wall Street Journal, July 23, 2024.