CarMax 2008 Annual Report Download - page 57

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4. SECURITIZATIONS
We use a securitization program to fund substantially all of the auto loan receivables originated by CAF. We sell
the auto loan receivables to a wholly owned, bankruptcy-remote, special purpose entity that transfers an undivided
interest in the receivables to a group of third-party investors. The special purpose entity and investors have no
recourse to our assets. Our risk is limited to the retained interest. The investors issue commercial paper supported
by the transferred receivables, and the proceeds from the sale of the commercial paper are used to pay for the
securitized receivables. This program is referred to as the warehouse facility. The return requirements of investors
in asset-backed commercial paper may fluctuate significantly depending on market conditions. These fluctuations
may have a significant impact on our funding costs.
We routinely use public securitizations to refinance the receivables previously securitized through the warehouse
facility. In a public securitization, a pool of auto loan receivables is sold to a bankruptcy-remote, special purpose
entity that in turn transfers the receivables to a special purpose securitization trust. The securitization trust issues
asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the
sale of the securities are used to pay for the securitized receivables. Depending on the securitization structure and
market conditions, refinancing receivables in a public securitization could have a significant impact on our results of
operations. The impact of refinancing activity will depend upon the particular securitization structures and market
conditions at the refinancing date.
All transfers of receivables are accounted for as sales. When the receivables are securitized, we recognize a gain or
loss on the sale of the receivables as described in Note 3.
Years Ended February 29 or 28
(In millions) 2008 2007 2006
Net loans originated................................................................... $ 2,429.7 $ 2,242.3 $ 1,774.6
Total loans sold.......................................................................... $ 2,534.4 $ 2,322.7 $ 1,887.5
Total gain income(1) ................................................................... $ 48.5 $ 99.7 $ 77.1
Total gain income as a percentage of total loans sold (1)............ 1.9% 4.3% 4.1%
(1) Includes the effects of valuation adjustments, new public securitizations and the repurchase and resale of receivables in
existing public securitizations, as applicable.
Retained Interest
We retain an interest in the auto loan receivables that we securitize. The retained interest includes the present value
of the expected residual cash flows generated by the securitized receivables, or “interest-only strip receivables,”
various reserve accounts, required excess receivables and retained subordinated bonds, as described below. On a
combined basis, the reserve accounts and required excess receivables are generally 2% to 4% of managed
receivables. The interest-only strip receivables, reserve accounts and required excess receivables serve as a credit
enhancement for the benefit of the investors in the securitized receivables. The special purpose entities and the
investors have no recourse to our assets.
The fair value of the retained interest was $270.8 million as of February 29, 2008, and $202.3 million as of
February 28, 2007. The retained interest had a weighted average life of 1.5 years as of February 29, 2008, and
February 28, 2007. The weighted average life in periods (for example, months or years) of prepayable assets is
calculated by multiplying the principal collections expected in each future period by the number of periods until that
future period, summing those products and dividing the sum by the initial principal balance.
Interest-only strip receivables. Interest-only strip receivables represent the present value of residual cash flows we
expect to receive over the life of the securitized receivables. The value of these receivables is determined by
estimating the future cash flows using our assumptions of key factors, such as finance charge income, loss rates,
prepayment rates, funding costs and discount rates appropriate for the type of asset and risk. The value of interest-
only strip receivables may be affected by external factors, such as changes in the behavior patterns of customers,
changes in the strength of the economy and developments in the interest rate markets; therefore, actual performance
may differ from these assumptions. We evaluate the performance of the receivables relative to these assumptions on
a regular basis. Any financial impact resulting from a change in performance is recognized in earnings in the period
in which it occurs.