Ford 2003 Annual Report Download - page 62

60 FORD MOTOR COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Consistent with conventional practices in the securitization industry, Ford Credit uses SPEs in securitization transactions to
achieve isolation of the sold receivables for the benefit of securitization investors. Most of the SPEs used in Ford Credit’s
securitization transactions are classified as qualifying special purpose entities consistent with the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, because of the nature of the assets
held by these entities and the limited nature of their activities. When these accounting rules are met, the sold receivables are
removed from our balance sheet. The use of SPEs in the typical securitization structure shown above, along with the use of
various forms of credit and payment enhancements to reduce the risk of loss (as discussed below), allows the SPE to issue
senior asset-backed securities that generally receive the highest short-term debt ratings and among the highest long-term
debt ratings, thereby providing Ford Credit with a cost-effective source of funding.
Ford Credit also sponsors one securitization program, FCAR Owner Trust (“FCAR”), which does not use qualifying SPEs under
SFAS No. 140. In the second quarter of 2003, Ford Credit purchased a portion of equity interests in FCAR from unaffiliated
parties for $175 million. As a result of this transaction, FCAR’s assets, liabilities and results of operations were consolidated into
our financial statements. The effects of this transaction are more fully described in Note 8 of the Notes to Financial Statements.
Ford Credit selects receivables at random for securitization transactions using selection criteria designed for the specific
transaction. The selection criteria are generally based on factors such as location of the obligor, contract term, payment
schedule, interest rate, financing program, and the type of financed vehicle. In general, the criteria also require receivables
to be active and in good standing.
Ford Credit often retains interests in the securitized receivables. The retained interests may include senior and subordinated
securities, undivided interests in wholesale receivables, restricted cash held for the benefit of the SPEs (for example, a reserve
fund) and interest-only strips. Subordinated securities represent lower rated classes of securities issued by the SPEs. Restricted
cash is funded initially by a small portion of proceeds from the sale of receivables that may be used to pay principal and interest
to SPE investors and, after investors are fully paid, remaining cash is returned to Ford Credit. Interest-only strips, also referred to
as excess spread, represent the right to receive collections on the sold finance receivables in excess of amounts needed by the
SPE to pay interest and principal to investors, servicing fees and other required payments. Because Ford Credit typically retains
the most subordinated interests in the SPE, including subordinated securities, the right to receive excess spread (interest-only
strip) and any residual or remainder interests of the SPE after all asset-backed securities are repaid in full, Ford Credit’s retained
interests will be the first to absorb any credit losses on the sold receivables. Because the credit enhancements are structured
to protect the holders of the senior asset-backed securities in highly stressed receivables performance scenarios, the impact of
credit losses in the pool of sold receivables will likely be limited to Ford Credit’s retained interests in terms of the timing and total
amount of excess spread it receives. Therefore, related to receivables sold in securitizations, Ford Credit retains credit risk up to
the amount of subordinated interests it retains in securitizations. If the receivables were not securitized, Ford Credit’s risk related
to credit losses would not be limited as it is in securitizations.
At December 31, 2003 and 2002, the total outstanding principal amount of receivables sold by Ford Credit in securitizations was
$49.4 billion and $71.4 billion, respectively. This decrease reflected primarily the reacquired receivables following consolidation of
FCAR now reported on our balance sheet (as discussed above) and the slower pace of securitizations in 2003. At December 31,
2003 and 2002, Ford Credit’s retained interests in such sold receivables were $13.0 billion and $17.6 billion, respectively.
Ford Credit has no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in default.
The holders of the asset-backed securities have no recourse to Ford Credit or its other assets for credit losses on the sold
receivables and have no ability to require Ford Credit to repurchase their securities. Ford Credit does not guarantee any
securities issued by SPEs. However, as is customary in asset-backed securitization transactions, Ford Credit, as the seller of
the finance receivables to the SPE and servicer of such receivables, is obligated to provide certain support obligations. These
include indemnification of the SPE and its trustees, the requirement to repurchase receivables that do not meet eligibility criteria
or that have been materially modified by the servicer, the obligation to sell additional receivables in certain transactions and the
advancing of interest payment short falls. Based on its experience, Ford Credit does not expect to make any indemnification
payments. In 2003, Ford Credit was not required to repurchase any sold receivables due to their failure to meet eligibility
criteria and the principal amount of receivables repurchased due to servicer modifications was about $193 million for all retail
securitization programs.
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