CarMax 2009 Annual Report Download - page 55

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GAIN (LOSS) ON LOANS SOLD
Years Ended February 28 or 29
(In millions) 2009 2008 2007
Net loans originated................................................................... $1,935.0 $ 2,429.7 $ 2,242.3
Total loans sold.......................................................................... $ 2,031.2 $ 2,534.4 $ 2,322.7
Total (loss) gain......................................................................... $ (35.3) $ 48.5 $ 99.7
Total (loss) gain as a percentage of total loans sold ................. (1.7)% 1.9% 4.3%
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. As of
February 28, 2009, on a combined basis, the reserve accounts and required excess receivables were 4.5% 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 fair value of the retained interest was $348.3 million as of February 28, 2009, and $270.8 million as of
February 29, 2008. Additional information on fair value measurements is included in Note 6. The receivables
underlying the retained interest had a weighted average life of 1.5 years as of February 28, 2009, and
February 29, 2008. 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 could 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 and credit markets; therefore, actual
performance could 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.
Reserve accounts. We are required to fund various reserve accounts established for the benefit of the securitization
investors. In the event that the cash generated by the securitized receivables in a given period was insufficient to
pay the interest, principal and other required payments, the balances on deposit in the reserve accounts would be
used to pay those amounts. In general, each of our securitizations requires that an amount equal to a specified
percentage of the original balance of the securitized receivables be deposited in a reserve account on the closing date
and that any excess cash generated by the receivables be used to fund the reserve account to the extent necessary to
maintain the required amount. If the amount on deposit in the reserve account exceeds the required amount, the
excess is released through the special purpose entity to us. In the term securitizations, the amount required to be on
deposit in the reserve account must equal or exceed a specified floor amount. The reserve account remains funded
until the investors are paid in full, at which time the remaining balance is released through the special purpose entity
to us. The amount on deposit in reserve accounts was $41.4 million as of February 28, 2009, and $37.0 million as of
February 29, 2008.
Required excess receivables. The total value of the securitized receivables must exceed the principal amount owed
to the investors by a specified amount. The required excess receivables balance represents this specified amount.
Any cash flows generated by the required excess receivables are used, if needed, to make payments to the investors.
Any remaining cash flows from the required excess receivables are released through the special purpose entity to us.
The unpaid principal balance related to the required excess receivables was $139.1 million as of February 28, 2009,
and $63.0 million as of February 29, 2008.
Retained subordinated bonds. In fiscal 2009 and 2008, we retained subordinated bonds issued by securitization
trusts. We receive interest payments on the bonds. The bonds are carried at fair value and changes in fair value are
included in earnings as a component of CAF income. We base our valuation on observable market prices of the
same or similar instruments when available; however, observable market prices are not currently available for these
assets due to illiquidity in the credit markets. Our current valuations are primarily based on an average of three non-
binding, current market spread quotes from third-party investment banks. By applying these average spreads to
current bond benchmarks, as determined through the use of a widely accepted third-party bond pricing model, we