Ford 2002 Annual Report Download - page 49

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
achievement of at least breakeven pre-tax earnings in our Automotive operations in 2003. On October 30, 2002, S&P affirmed
Hertz’ long-term debt rating at BBB and its short-term debt rating at A2. On March 7, 2003, S&P affirmed the long-term debt
ratings of Ford and Ford Credit at BBB and the short-term debt rating of Ford Credit at A2. The outlook for all companies
is negative.
OFF-BALANCE SHEET ARRANGEMENTS
We have entered into various arrangements not reflected on our balance sheet that have or are reasonably likely to have a
current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources. These include guarantees, sales of receivables by Ford Credit, and variable interest entities, each of
which is discussed below.
GUARANTEES (SEE ALSO NOTE 24 OF THE NOTES TO OUR FINANCIAL STATEMENTS)
Occasionally, we guarantee debt and lease obligations of joint venture entities and other third parties with which we do business
to support their growth. As of December 31, 2002, our maximum potential exposure under these guarantees was $486 million.
In the ordinary course of business, we also execute contracts involving indemnifications standard in the industry and
indemnifications specific to a transaction. These indemnifications include claims for any of the following: environmental, tax,
and shareholder matters; intellectual property rights; governmental regulations and employment-related matters; financial
matters; and dealer, supplier, and other commercial contractual relationships. Performance under these indemnities would
generally be triggered by a breach of terms of the contract or by a third party claim.
SALES OF RECEIVABLES BY FORD CREDIT
Securitizations
Ford Credit regularly uses securitization to fund its operations. Ford Credit securitizes its receivables because the highly-liquid
and efficient market provides Ford Credit with a cost-effective source of funding. Ford Credit most frequently securitizes retail
installment sale contracts. Ford Credit also securitizes receivables from Ford-franchised dealers and non-Ford dealers
representing loans used to finance their automobile floorplan inventories, generally referred to as wholesale receivables or
floorplan receivables. Ford Credit occasionally engages in securitization of operating leases. In 2002, Ford Credit significantly
expanded securitization of finance receivables by foreign subsidiaries.
In a typical securitization, Ford Credit sells a pool of finance receivables to a wholly-owned, bankruptcy-remote special purpose
subsidiary that establishes a separate special purpose trust or entity (“SPE”) and transfers the receivables to the SPE in
exchange for the proceeds from securities issued by the SPE. Following the transfer of the sold receivables to the SPE, the
receivables are no longer assets of Ford Credit and the sold receivables no longer appear on our balance sheet. The SPE issues
interest-bearing securities, usually notes or certificates of various maturities and interest rates, which are paid by the SPE from
future collections on the receivables it owns. These securities, commonly referred to as asset-backed securities, are structured
into senior and subordinated classes. The senior classes have priority over the subordinated classes in receiving collections from
the receivables and may also benefit from other enhancements such as over-collateralization, excess spread and cash reserve
funds. These securities generally are rated by independent rating agencies and sold in public offerings or in private transactions.
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