Toyota 2006 Annual Report Download - page 80

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interests, investors in securitizations have no recourse to Toyota,
any cash reserve funds, or any amounts available or funded
under the revolving liquidity notes discussed below. Toyota does
not guarantee any securities issued by the securitization trust.
Each SPE has a limited purpose and may only be used to pur-
chase and sell the receivables. The individual securitization trusts
have a limited duration and generally terminate when investors
holding the asset-backed securities have been paid all amounts
owed to them.
The SPE retains an interest in the securitization trust. The
retained interest includes subordinated securities issued by the
securitization trust and interest-only strips representing the right
to receive any excess interest. The retained interests are subordi-
nated and serve as credit enhancements for the more senior
securities issued by the securitization trust. The retained inter-
ests are held by the SPE as restricted assets and are not available
to satisfy any obligations of Toyota. If forecasted future cash
flows result in an other-than-temporary decline in the fair value
of the retained interests, then an impairment loss is recognized
to the extent that the fair value is less than the carrying amount.
Such losses would be included in the consolidated statement of
income. These retained interests as well as senior securities pur-
chased by Toyota are reflected in the consolidated balance
sheet for accounting purposes.
Various other forms of credit enhancements are provided to
reduce the risk of loss for senior classes of securities. These cred-
it enhancements may include the following:
Cash reserve funds or restricted cash
A portion of the proceeds from the sale of asset-backed
securities may be held by the securitization trust in segregated
reserve funds and may be used to pay principal and interest to
investors if collections on the sold receivables are insufficient. In
the event a trust experiences charge-offs or delinquencies above
specified levels, additional excess amounts from collections on
receivables held by the securitization trusts will be added to
such reserve funds.
Revolving liquidity notes
In certain securitization structures, revolving liquidity notes
(“RLN”) are used in lieu of deposits to a cash reserve fund. The
securitization trust may draw upon the RLN to cover any short-
fall in interest and principal payments to investors. Toyota funds
any draws, and the terms of the RLN obligate the securitization
trust to repay amounts drawn plus accrued interest.
Repayments of principal and interest due under the RLN are
subordinated to principal and interest payments on the asset-
backed securities and, in some circumstances, to deposits into a
reserve account. If collections are insufficient to repay amounts
outstanding under a RLN, Toyota will recognize a loss for the
outstanding amounts. Toyota must fund the entire amount
available under the RLN if Toyota’s short-term unsecured debt
rating is downgraded below P-1 or A-1 by Moody’s or S&P,
respectively. Management believes the likelihood of Toyota
incurring such losses or Toyota’s short-term credit rating being
downgraded is remote. There were no outstanding amounts
drawn on the RLN’s at March 31, 2005 and 2006. The RLN had
no material fair value as of March 31, 2005 and 2006. Toyota
has not recognized a liability for the RLN because it does not
expect to be required to fund any amounts under the RLN.
Toyota may enter into a swap agreement with the securiti-
zation trust under which the securitization trust is obligated to
pay Toyota a fixed rate of interest on payment dates in
exchange for receiving amounts equal to the floating rate of
interest payable on the asset backed securities. This arrange-
ment enables the securitization trust to issue securities bearing
interest on a basis different from that of the receivables held.
Toyota continues to service the sold receivables for a servic-
ing fee. Toyota’s servicing duties include collecting payments on
receivables and submitting them to the trustee for distribution
to the certificate holders. While servicing the sold receivables for
the securitization trusts, Toyota applies the same servicing poli-
cies and procedures that are applied to the owned receivables
and maintains a normal relationship with the financing
customers.
Other significant provisions relating to securitizations are
described below.
Receivable repurchase obligations
Toyota makes certain representations and warranties to the SPE,
and the SPE makes corresponding representations and war-
ranties to the securitization trust, relating to receivables sold in
a securitization. Toyota and the SPE may be required to repur-
chase any receivables in the event of a breach of a representa-
tion and warranty relating to the receivable that materially and
adversely affects the interest of the SPE, or securitization trust,
as applicable. In addition, Toyota, as servicer of the receivables,
may be required to repurchase any receivable in the event of a