Ford 2009 Annual Report Download - page 52

Management’s Discussion and Analysis of Financial Condition and Results of Operations
50 Ford Motor Company | 2009 Annual Report
Ford Credit plans its managed leverage by considering prevailing market conditions and the risk characteristics of its
business. At December 31, 2009, Ford Credit's managed leverage was 7.3 to 1, compared with 9.9 to 1 a year ago. Ford
Credit's managed leverage is significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support
Agreement with us. In 2009, Ford Credit distributed $1.5 billion to its parent, which included in the first quarter of 2009 a
non-cash distribution of about $1.1 billion and in the third quarter of 2009 a cash distribution of $400 million and a non-cash
distribution of $31 million for Ford Credit's ownership interest in AB Volvofinans.
Securitization Transactions by Ford Credit
Securitization. Ford Credit securitizes finance receivables and net investment in operating leases through a variety of
programs, utilizing amortizing, variable funding, and revolving structures. Ford Credit also sells finance receivables in
structured financing transactions. Due to the similarities between securitization and structured financing, Ford Credit refers
to structured financings as securitization transactions. Ford Credit's securitization programs are targeted to many different
investors in both public and private transactions in capital markets worldwide. Ford Credit completed its first securitization
transaction in 1988, and regularly securitizes assets, purchased or originated, in the United States, Canada, Mexico, and
Europe.
Most of Ford Credit's securitization transactions do not satisfy the requirements for accounting sale treatment, and the
securitized assets and related debt remain on Ford Credit's balance sheet. Some of Ford Credit's securitization
transactions, however, do satisfy accounting sale treatment and are not reflected on Ford Credit's balance sheet in the
same way as debt funding. 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 its 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