Ford 2003 Annual Report Download - page 52

50 FORD MOTOR COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
At December 31, 2003, Ford Credit had cash and cash equivalents of $15.7 billion. In the normal course of its funding activities,
Ford Credit may generate more proceeds than are necessary for its immediate funding needs. These excess amounts are
maintained primarily as highly liquid investments, provide liquidity for Ford Credit’s short-term funding obligations and give it
flexibility in the use of its other funding programs.
Funding — Ford Credit requires substantial funding in the normal course of business. Ford Credit’s funding requirements are
driven mainly by the need to (i) purchase retail installment sale contracts and vehicle leases to support the sale of Ford products,
which are influenced by Ford-sponsored special financing and leasing programs that are available exclusively through Ford
Credit, (ii) provide vehicle inventory and capital financing for Ford dealers, and (iii) repay its debt obligations.
Ford Credit’s funding sources include debt issuances, sales of receivables in securitizations, and bank borrowings. Debt issuance
consists of short- and long-term unsecured debt, placed directly by Ford Credit or through securities dealers or underwriters in
the United States and international capital markets, and reaches both retail and institutional investors. Ford Credit issues
commercial paper in the United States, Europe, Canada and other international markets. In addition to its commercial paper
programs, Ford Credit also obtains short-term funding from the sale of floating rate demand notes, which may be redeemed at
any time at the option of the holder thereof without restriction. At December 31, 2003, the principal amount outstanding of such
notes was $7.3 billion. Ford Credit does not hold reserves specifically to fund the payment of the demand notes or any other
short-term funding obligation. Ford Credit’s policy is to have sufficient cash and cash equivalents, unused committed bank-
sponsored asset-backed commercial paper issuer capacity, securitizable assets, and back-up credit facilities to provide
liquidity for all of its short-term funding obligations.
During 2003, Ford Credit continued to meet a significant portion of its funding requirements by selling receivables in securitizations
because of the stability of the market for asset-backed securities, their lower relative costs given our credit ratings (as described
below), and the diversity of funding sources that they provide. Securitized funding (both on- and off-balance sheet, net of retained
interests) as a percent of total managed receivables was as follows as of the end of each of the last three years: 2003 - 25%,
2002 - 27%, 2001 - 23%.
The following table illustrates Ford Credit’s term public funding issuances for 2002 and 2003 and its planned issuances
for 2004 (in billions):
2004
Forecast 2003 2002
Unsecured Term Debt
Institutional $ 4 – 6 $16 $11
Retail 4 – 6 43
Total unsecured term debt 8 – 12 20 14
Term Public Securitization* 10 – 15 11 17
Total term public funding $ 20 – 25 $31 $31
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* Reflects new issuance; excludes asset sales to bank-sponsored asset-backed commercial paper issuers, whole-loan sales, and other structured financings.
The cost of both debt and funding in securitizations is based on a margin or spread over a benchmark interest rate, such as
interest rates paid on U. S. Treasury securities of similar maturities. Over the last two years, spreads on Ford Credit’s securitized
funding have fluctuated between 35 and 86 basis points above comparable U.S. Treasury securities, while Ford Credit’s
unsecured long-term debt funding spreads have fluctuated between 186 and 662 basis points above comparable U.S. Treasury
securities. In 2003, Ford Credit’s unsecured term-debt spreads fluctuated between 186 and 638 basis points above comparable
U.S. Treasury securities, with an average spread of 341 basis points and a year-end spread of 186 basis points above
comparable U.S. Treasury securities.
Ford Credit also continued its program to sell retail installment sale contracts in transactions where it retains no interest and thus
no exposure to the sold contracts. These transactions, which we refer to as “whole-loan sale transactions,” provide liquidity by
enabling Ford Credit to reduce its managed receivables and its need for funding to support those receivables. In 2003, Ford
Credit sold $5.5 billion of retail finance receivables through whole-loan sales.
As a result of Ford Credit’s funding strategy and the reduction in its managed receivables, the lowering of its credit ratings over
the past three years has not had a material impact on Ford Credit’s ability to fund its operations, although lower credit ratings
have contributed to an increase in its overall borrowing costs. In 2003, its funding strategy continued to focus on maintaining
liquidity and access to diversified funding sources that are cost effective. Any further lowering of its credit ratings may increase
Ford Credit’s borrowing costs and potentially constrain its funding sources. This could likely cause Ford Credit to increase its use
of securitization or other sources of liquidity or to reduce its managed receivables. Ford Credit’s ability to sell its receivables may
be affected by the following factors: the amount and credit quality of receivables available to sell, the performance of receivables
sold in previous transactions, general demand for the type of receivables Ford Credit offers, market capacity for Ford Credit-
sponsored investments, accounting and regulatory changes, Ford Credit’s debt ratings and Ford Credit’s ability to maintain back-up
liquidity facilities for certain securitization programs. If as a result of any of these or other factors, the cost of securitized funding
significantly increased or securitized funding were no longer available to Ford Credit, its liquidity would be adversely impacted.
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