Ford 2011 Annual Report Download - page 68

Management’s Discussion and Analysis of Financial Condition and Results of Operations
66 Ford Motor Company | 2011 Annual Report
Ford Credit retains interests in its securitization transactions, including primarily 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.
Ford Credit is engaged as servicer to collect and service the securitized assets. Its servicing duties include collecting
payments on the securitized assets and preparing monthly investor reports on the performance of the securitized assets
and on amounts of interest and/or principal payments to be made to investors. While servicing securitized assets, Ford
Credit applies the same servicing policies and procedures that Ford Credit applies to its owned assets and maintains its
normal relationship with its financing customers.
Ford Credit generally has no obligation to repurchase or replace any securitized asset that subsequently becomes
delinquent in payment or otherwise is in default. Securitization investors have no recourse to Ford Credit or its other
assets for credit losses on the securitized assets and have no right to require Ford Credit to repurchase the investments.
Ford Credit does not guarantee any asset-backed securities, although it is the co-obligor of the debt of a consolidated VIE
up to $250 million for two of its securitization transactions, and has no obligation to provide liquidity or make monetary
contributions or contributions of additional assets to its SPEs either due to the performance of the securitized assets or
the credit rating of its short-term or long-term debt. However, as the seller and servicer of the securitized assets, Ford
Credit is obligated to provide certain kinds of support to its securitization transactions, which are customary in the
securitization industry. These obligations include indemnifications, repurchase obligations on assets that do not meet
representations or warranties on eligibility criteria or that have been materially modified, the mandatory sale of additional
assets in revolving transactions, and, in some cases, servicer advances of certain amounts.
Risks to Continued Funding under Securitization Programs. The following securitization programs contain structural
features that could prevent Ford Credit from using these sources of funding in certain circumstances:
• Retail Securitization. If the credit enhancement on any asset-backed security held by FCAR is reduced to zero,
FCAR may not purchase any additional asset-backed securities or issue additional commercial paper and would
wind down its operations. In addition, if credit losses or delinquencies in Ford Credit's portfolio of retail assets
exceed specified levels, FCAR is not permitted to purchase additional asset-backed securities for so long as such
levels are exceeded.
• Retail Conduits. If credit losses or delinquencies on the pool of assets held by a conduit exceed specified levels,
or if the level of over-collateralization or credit enhancements for such pool decreases below a specified level,
Ford Credit will not have the right to sell additional pools of assets to that conduit.
• Wholesale Securitization. If the payment rates on wholesale receivables in the securitization trust are lower than
specified levels or if there are significant dealer defaults, Ford Credit will be unable to obtain additional funding
and any existing funding would begin to amortize.
• Lease Warehouse. If credit losses or delinquencies in Ford Credit's portfolio of retail lease contracts exceed
specified levels, Ford Credit will be unable to obtain additional funding from the securitization of retail lease
contracts through its lease warehouse facility (i.e., a credit facility under which draws are backed by the retail
lease contracts).
In the past, these features have not limited Ford Credit's ability to use securitization to fund its operations.
In addition to the specific transaction-related structural features discussed above, Ford Credit's securitization
programs may be affected by the following factors: market disruption and volatility, the market capacity for Ford Credit
and Ford Credit's sponsored investments, the general demand for the type of assets supporting the asset-backed
securities, the availability of committed liquidity facilities, the amount and credit quality of assets available, the
performance of assets in its previous securitization transactions, accounting and regulatory changes, and Ford Credit's
credit ratings. In addition, a bankruptcy of Ford, Ford Credit, or FCE would cause certain of Ford Credit's funding
transactions to amortize and result in a termination of certain liquidity commitments. If, as a result of any of these or other
factors, the cost of securitization funding were to increase significantly or funding through securitization transactions were
no longer available to Ford Credit, it would have a material adverse impact on Ford Credit's financial condition and results
of operations, which could adversely affect its ability to support the sale of Ford vehicles.