Ford 2010 Annual Report Download - page 55

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2010 Annual Report 53
All of Ford Credit's securitization transactions involve sales to consolidated entities or Ford Credit maintains control
over the assets, and, therefore, the securitized assets and related debt remain on its balance sheet. All of Ford Credit's
securitization transactions since the first quarter of 2007 have been on-balance sheet transactions. Both on- and off-
balance sheet securitization transactions have an effect on Ford Credit's financial condition, operating results, and
liquidity.
Ford Credit securitizes its assets because the securitization market provides it with a lower cost source of funding
compared with unsecured debt given Ford Credit's present credit ratings, and it diversifies Ford Credit's funding among
different markets and investors. In the United States, Ford Credit is generally able to obtain funding in two days for its
unutilized capacity in most of its committed liquidity programs. New programs and new transaction structures typically
require substantial development time before coming to market.
In a securitization transaction, the securitized assets are generally held by a bankruptcy-remote special purpose
entity ("SPE") in order to isolate the securitized assets from the claims of Ford Credit's other creditors and ensure that
the cash flows on the securitized assets are available for the benefit of securitization investors. As a result, payments to
securitization investors are based on the creditworthiness of the securitized assets and any enhancements, and not on
Ford Credit's creditworthiness. Senior asset-backed securities issued by the SPEs generally receive the highest short-
term credit ratings and among the highest long-term credit ratings from the rating agencies that rate them.
Securitization SPEs have limited purposes and generally are only permitted to purchase the securitized assets, issue
asset-backed securities, and make payments on the securities. Some SPEs, such as certain trusts that issue securities
backed by retail installment sale contracts, only issue a single series of securities and generally are dissolved when
those securities have been paid in full. Other SPEs, such as the trusts that issue securities backed by wholesale
receivables, issue multiple series of securities from time to time and are not dissolved until the last series of securities is
paid in full.
Ford Credit's use of SPEs in its securitization transactions is consistent with conventional practices in the securitization
industry. Ford Credit sponsors the SPEs used in all of its securitization programs with the exception of bank-sponsored
conduits. None of Ford Credit's officers, directors, or employees holds any equity interests in its SPEs or receives any
direct or indirect compensation from the SPEs. These SPEs do not own Ford Credit's shares or shares of any of its
affiliates.
In order to be eligible for inclusion in a securitization transaction, each asset must satisfy certain eligibility criteria
designed for the specific transaction. For example, for securitization transactions of retail installment sale contracts, the
selection criteria may be based on factors such as location of the obligor, contract term, payment schedule, interest rate,
financing program, the type of financed vehicle, and whether the contracts are active and in good standing (e.g., when the
obligor is not more than 30-days delinquent or bankrupt). Generally, Ford Credit selects the assets to be included in a
particular securitization randomly from its entire portfolio of assets that satisfy the applicable eligibility criteria.
Ford Credit provides various forms of credit enhancements to reduce the risk of loss for securitization investors.
Credit enhancements include over-collateralization (when the principal amount of the securitized assets exceeds the
principal amount of related asset-backed securities), segregated cash reserve funds, subordinated securities, and
excess spread (when interest collections on the securitized assets exceed the related fees and expenses, including
interest payments on the related asset-backed securities). Ford Credit may also provide payment enhancements that
increase the likelihood of the timely payment of interest and the payment of principal at maturity. Payment
enhancements include yield supplement arrangements, interest rate swaps, and other hedging arrangements, liquidity
facilities, and certain cash deposits.
Ford Credit retains interests in its securitization transactions, including senior and subordinated securities issued by
the SPE, rights to cash held for the benefit of the securitization investors (for example, a reserve fund), and residual
interests. Residual interests represent the right to receive collections on the securitized assets in excess of amounts
needed to pay securitization investors and to pay other transaction participants and expenses. Ford Credit retains credit
risk in securitization transactions because its retained interests include the most subordinated interests in the securitized
assets and are structured to absorb expected credit losses on the securitized assets before any losses would be
experienced by investors. Based on past experience, Ford Credit expects that any losses in the pool of securitized
assets would likely be limited to its retained interests.