Ford 2002 Annual Report Download - page 50

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Ford Credit uses SPEs in securitization transactions to achieve isolation of the sold receivables for the benefit of securitization
investors. Assuming, accounting rules are met, the sold receivables are removed from our balance sheet. The use of SPEs in
this way allows the SPE to issue senior securities (typically with a higher debt rating than Ford Credit’s debt securities) in a
highly-liquid and efficient market, thereby providing Ford Credit with a cost-effective source of funding. The two-tiered sale of
receivables to a wholly-owned subsidiary and then to the SPE is conventional in the asset backed securitization market. Most
of the SPEs used in Ford Credit’s securitization transactions are classified as qualifying special purpose entities consistent with
the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
because of the nature of the assets held by these entities and the limited nature of their activities. Ford Credit also sponsors one
securitization SPE, FCAR Owner Trust (“FCAR”), that is not a qualifying SPE under SFAS No. 140 because its permitted activities
are not sufficiently limited. However, because FCAR maintains substantive third-party equity, this entity is not required to be con-
solidated in our financial statements at December 31, 2002 under applicable accounting rules. However, see “-Variable Interest
Entities” below and Note 13 of the Notes to our Financial Statements for a further discussion of the impact of FIN 46 on Ford
Credit's FCAR securitization structure and on other securitization structures utilized by Ford Credit. None of our or Ford Credit's
officers, directors or employees holds any equity interest in the SPEs or receives any direct or indirect compensation from the
SPEs. The SPEs do not own stock in either Ford or Ford Credit or any of their affiliates.
Ford Credit or its affiliates often retain interests in the securitized receivables. The retained interests may include senior and
subordinated securities, undivided interests in wholesale receivables, restricted cash held for the benefit of the SPEs and
interest-only strips. Subordinated securities represent lower rated classes of securities issued by the SPEs. Restricted cash is
funded initially by a small portion of proceeds from the sale of receivables that may be used to pay principal and interest to SPE
investors and, after investors are fully paid, remaining cash is returned to Ford Credit. Interest-only strips, also referred to as
excess spread, represent the right to receive collections on the sold finance receivables in excess of amounts needed by the
SPE to pay interest and principal to investors, servicing fees and other required payments. The subordinated securities,
restricted cash, interest-only strips, and a portion of the undivided interest in wholesale receivables serve as credit
enhancements to the holders of the more senior securities issued by the SPEs.
At December 31, 2002 and 2001, the total outstanding principal amount of receivables sold by Ford Credit in securitizations was
$71.3 billion and $58.7 billion, respectively. At those dates, Ford Credit's retained interests in such sold receivables were $17.6
billion and $12.5 billion, respectively.
Ford Credit has no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in
default. The holders of the asset-backed securities have no recourse to Ford Credit or its other assets for credit losses on the
sold receivables and have no ability to require Ford Credit to repurchase their securities. Ford Credit does not guarantee any
securities issued by SPEs. However, as is customary in asset-backed securitization transactions, Ford Credit, as the seller of
the finance receivables to the SPE and servicer of such receivables, is obligated to provide certain kinds of support. These
support obligations include indemnification of the SPE and its trustees, the requirement to repurchase receivables that do not
meet eligibility criteria or that have been materially modified by the servicer, the obligation to sell additional receivables in certain
transactions and the advancing of interest payment short falls. Based on its experience, Ford Credit does not expect to make
any indemnification payments. In 2002, Ford Credit was not required to repurchase any sold receivables due to their failure to
meet eligibility criteria and the principal amount of receivables repurchased due to servicer modifications was about $340 million
for all retail securitization programs.
Whole-loan Sales
In the fourth quarter of 2002, Ford Credit sold about $5 billion of retail installment sale contracts in two whole-loan sale
transactions. In addition, Ford Credit is contractually committed to sell an additional $2 billion of retail installment sale contract
receivables in the first quarter of 2003 through a whole-loan sale transaction. Ford Credit generally has the same indemnification,
repurchase and other obligations in whole-loan sale transactions as it does in securitization transactions. These continuing obli-
gations are discussed above. Ford Credit retains servicing rights and obligations with respect to the receivables sold in whole-
loan sale transactions and earns a servicing fee. Unlike securitizations, however, whole-loan sale transactions involve the sale of
receivables without Ford Credit or one of its affiliates retaining any interest in the sold receivables. Because Ford Credit does not
have retained interests in receivables sold through its whole-loan program, it does not have contractual or economic risk of loss
associated with those retained interests with respect to whole-loan sales of receivables. No SPEs are used in Ford Credit’s
whole-loan sale program.
Risks to Future Sales of Receivables
Some of Ford Credit’s securitization programs contain structural features that could prevent further funding if the credit losses
or delinquencies on a pool of sold receivables or on Ford Credit’s overall managed portfolio exceed specified levels or if
payment rates on or amounts of wholesale receivables are lower than specified levels. Ford Credit does not expect that any
of these features will have a material adverse impact on its ability to securitize receivables. In addition, Ford Credit’s ability to
sell its receivables may be affected by the following factors: the amount and credit quality of receivables available to sell, the