Ford 2005 Annual Report Download - page 48

Management’s Discussion and Analysis of Financial
Condition and Results of Operations
OFF-BALANCE SHEET ARRANGEMENTS
We have entered into various arrangements not reflected on our balance sheet that have or are reasonably likely to have a current or
future effect on our financial condition, results of operations or liquidity. These include sales of receivables by Ford Credit in off-
balance sheet transactions, variable interest entities and guarantees, each of which is discussed below.
Sales of Receivables by Ford Credit
Securitization. Ford Credit sells receivables in securitizations and other structured financings and in whole-loan sale transactions.
Some of these arrangements satisfy accounting sale treatment and are not reflected on Ford Credit's balance sheet in the same way as
debt funding. The remainder of these arrangements do not satisfy the requirements for accounting sale treatment and the sold
receivables and associated debt are not removed from Ford Credit's balance sheet.
Securitization involves the sale of a pool of receivables to a special purpose entity ("SPE"), typically a trust. The SPE issues
interest-bearing securities, commonly called asset-backed securities, that are backed by the sold receivables. The SPE uses proceeds
from the sale of these securities to pay the purchase price for the sold receivables. The SPE may only purchase the receivables, issue
asset-backed securities and make payments on the securities. The SPE has a limited duration and generally is dissolved when
investors holding the asset-backed securities have been paid all amounts owed to them. Ford Credit's use of SPEs in securitizations is
consistent with conventional practices in the securitization industry. The sale to the SPE achieves isolation of the sold receivables for
the benefit of securitization investors and protects them from the claims of Ford Credit's creditors. The use of SPEs combined with
the structure of these transactions means that the payment of the asset-backed securities is based on the creditworthiness of the
underlying finance receivables and any enhancements (as discussed below), and not Ford Credit's creditworthiness. As a result, the
senior asset-backed securities issued by the SPEs generally receive the highest short-term credit ratings and among the highest long-
term credit ratings from the credit rating agencies that rate them and are sold to securitization investors at cost-effective pricing.
Ford Credit's typical U.S. retail securitization is a two-step transaction. Ford Credit sells a pool of its retail installment sale
contracts to a wholly owned, bankruptcy-remote special purpose subsidiary that establishes a separate SPE, usually a trust, and
transfers the receivables to the SPE in exchange for the proceeds from securities issued by the SPE. The securities issued by the trust,
usually notes of various maturities and interest rates, are paid by the SPE from collections on the pool of receivables it owns. These
securities are usually structured into senior and subordinated classes. The senior classes have priority over the subordinated classes in
receiving collections from the sold receivables. The receivables acquired by the SPE and the asset-backed securities issued by the
SPE are assets and obligations of the SPE.
The following simplified diagram shows Ford Credit’s typical U.S. retail securitization transaction:
Ford Credit selects receivables at random for its securitization transactions using selection criteria designed for the specific
transaction. For securitizations of retail installment sale contracts, the selection criteria are based on factors such as location of the
obligor, contract term, payment schedule, interest rate, financing program, and the type of financed vehicle. In general, the criteria also
require receivables to be active and in good standing.
Ford Credit retains interests in receivables sold through securitizations. The retained interests may include senior and subordinated
securities issued by the SPE, restricted cash held for the benefit of the SPE (for example, a reserve fund) and residual interests in
securitization transactions. Income from residual interests in securitization transactions represents 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. Ford Credit retains credit risk in securitizations. Ford Credit’s retained interests usually include the most
subordinated interests in the SPE, which are the first to absorb credit losses on the sold receivables. Ford Credit's securitizations are
structured to protect the holders of the senior asset-backed securities such that, based on past experience, any credit losses in the pool
of sold receivables would likely be limited to Ford Credit's retained interests.
Ford
Credit
Receivables
Proceeds
Bankruptcy
Remote
Transaction
Special Purpose
Subsidiary
Receivables
Proceeds
Off
-
Balance Sheet
Transaction (if
applicable)
Securitization
Trust
(Qualifying
Special
Purpose Entity, if
applicable)
Securities
Proceeds
Investors
Ford Motor Company Annual Report 2005 46 Ford Motor Company Annual Report 2005 47