Ford 2003 Annual Report Download - page 61

2003 ANNUAL REPORT 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Sensitivity Analysis — The largest impact of changes in assumptions is on Ford Credit’s U.S. retail operating leases of
Ford, Lincoln and Mercury brand vehicles. If future auction values for all of the Ford, Lincoln, and Mercury vehicles in our U.S.
operating lease portfolio at year-end 2003 were to decrease by $100 per unit from our present estimates, the total impact would
be to increase our depreciation on these vehicles by about $55 million, which would be charged to depreciation expense during
the 2004 through 2006 period so that the net investment in operating leases at the end of the lease term for these vehicles is
equal to the revised residual value. Similarly, if future return rates for our existing portfolio of Ford, Lincoln and Mercury vehicles
in the U.S. were to increase by one percentage point from our present estimates, the total impact would be to increase our
depreciation on these vehicles by about $10 million in the 2004 through 2006 period. Adjustments to the amount of accumulated
depreciation on operating leases will be reflected on our balance sheet as Net investment in operating leases and on the income
statement in the Depreciation line, in each case under the Financial Services sector.
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 23 of the Notes to 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, 2003, our maximum potential exposure under these guarantees was $465 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 securitization market provides Ford Credit with a cost-effective source of funding, compared with unsecured debt
given Ford Credit’s present debt ratings. In a typical securitization transaction, Ford Credit sells a pool of finance receivables
to a wholly-owned, bankruptcy-remote special purpose subsidiary that establishes an SPE, usually a trust, and transfers the
receivables to the SPE in exchange for proceeds from interest-bearing securities, commonly called asset-backed securities,
that are issued by the SPE and are secured by future collections on the sold receivables. Following the transfer of the sold
receivables to the SPE, and assuming compliance with SFAS No. 140 (discussed below), the receivables are no longer assets
of Ford Credit and the sold receivables no longer appear on our balance sheet. The securities issued by the SPE 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 and cash reserve funds.
These securities generally are rated by independent rating agencies and sold in public offerings or in private transactions.
The following chart diagrams Ford Credit’s typical securitization transaction:
Ford Credit Investors
Special Purpose
Subsidiary
Securitization
Trust
(Qualifying Special
Purpose Entity)
Bankruptcy
Remote
Transaction
Off-Balance
Sheet Transaction
Receivables
Proceeds
Receivables
Proceeds
Securities
Proceeds
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