CarMax 2001 Annual Report Download - page 48

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CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
Circuit City Stores, Inc.
hypothetical effect on the fair value of those interests when
there are unfavorable variations from the assumptions used. Key
economic assumptions at February 28, 2001, are not materially
different than assumptions used to measure the fair value of
retained interests at the time of securitization. These sensitivi-
ties are hypothetical and should be used with caution. In this
table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing
any other assumption; in reality, changes in one factor may
result in changes in another, which might magnify or counter-
act the sensitivities.
Impact on Impact on
Assumptions Fair Value Fair Value
(Dollar amounts Used of 10% of 20%
in thousands) (Annual) Adverse Change Adverse Change
Payment rate ........... 7.1—11.3% $10,592 $20,107
Default rate.............. 7.0—14.3% $21,159 $42,318
Discount rate........... 10.0 —15.0% $ 2,973 $ 5,892
(B) AUTOMOBILE LOAN SECURITIZATIONS: The Company also
has an asset securitization program, operated through a special
purpose subsidiary on behalf of the CarMax Group, to finance
the consumer installment credit receivables generated by its
automobile loan finance operation. This automobile loan securi-
tization program had a total program capacity of $450 million
as of February 28, 2001, with no recourse provisions. In October
1999, the Company formed a second securitization facility that
allowed for a $644 million securitization of automobile loan
receivables in the public market. Because of the amortization of
the automobile loan receivables and corresponding securities in
this facility, the program had a capacity of $329 million as of
February 28, 2001, with no recourse provisions. In January
2001, the Company sold $655 million of receivables in the pub-
lic market through an additional owner trust structure. The pro-
gram had a capacity of $655 million as of February 28, 2001,
with no recourse provisions. In these securitizations, the
Company retains servicing rights and subordinated interests.
The Company’s retained interests are subject to credit and pre-
payment risks on the transferred financial assets.
At February 28, 2001, the total principal amount of loans
managed or securitized was $1,296 million. Of the total loans,
the principal amount of loans securitized was $1,284 million and
the principal amount of loans held for sale or investment was
$12 million. The principal amount of loans that were 31 days or
more delinquent was $18.1 million at February 28, 2001. The
credit losses net of recoveries were $7.2 million for fiscal 2001.
The Company receives annual servicing fees approximating
1 percent of the outstanding principal balance of the securitized
automobile loans and rights to future cash flows arising after the
investors in the securitization trust have received the return for
which they contracted. The servicing fee specified in the auto-
mobile loan securitization agreements adequately compensates
the finance operation for servicing the accounts. Accordingly, no
servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from
and paid to securitization trusts:
Year Ended
(Amounts in thousands) February 28, 2001
Proceeds from new securitizations ................................ $619,525
Proceeds from collections reinvested
in previous automobile loan securitizations........... $313,827
Servicing fees received ................................................... $ 10,474
Other cash flows received on retained interests*......... $ 39,265
* This amount represents total cash flows received from retained interests by
the transferor other than servicing fees, including cash flows from interest-only
strips and cash above the minimum required level in cash collateral accounts.
In determining the fair value of retained interests, the
Company estimates future cash flows using management’s best
estimates of key assumptions such as finance charge income,
default rates, prepayment rates and discount rates. The Company
employs a risk-based pricing strategy that increases the stated
annual percentage rate for accounts that have a higher predicted
risk of default. Accounts with a lower risk profile also may qual-
ify for promotional financing.
Rights recorded for future finance income from serviced
assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $42.0 million at February
28, 2001, and are included in net accounts receivable. Gains on
sales of $35.4 million were recorded in fiscal 2001.
The fair value of retained interests at February 28, 2001, was
$74.1 million with a weighted-average life ranging from 1.5 years
to 1.8 years. The table below shows the key economic assumptions
used in measuring the fair value of retained interests at February
28, 2001, and a sensitivity analysis showing the hypothetical
effect on the fair value of those interests when there are unfavor-
able variations from the assumptions used. Key economic assump-
tions at February 28, 2001, are not materially different than
assumptions used to measure the fair value of retained interests at
the time of securitization. These sensitivities are hypothetical and
should be used with caution. In this table, the effect of a variation
in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption; in reality,
changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.
Impact on Impact on
Assumptions Fair Value Fair Value
(Dollar amounts Used of 10% of 20%
in thousands) (Annual) Adverse Change Adverse Change
Prepayment speed..... 1.5 —1.6% $1,840 $3,864
Default rate ................ 1.0 —1.2% $1,471 $3,050
Discount rate.............. 12.0% $ 890 $1,786