Ford 2006 Annual Report Download - page 33

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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31
Ford Credit believes that managed leverage is useful to its investors because it reflects the way Ford Credit manages
its business. Ford Credit retains interests in receivables sold in off-balance sheet securitization transactions and, with
respect to subordinated retained interests, is exposed to credit risk. Accordingly, Ford Credit evaluates charge-offs,
receivables and leverage on a managed as well as a financial statement basis. Ford Credit also deducts cash and cash
equivalents and marketable securities (excluding marketable securities related to insurance activities) because they
generally correspond to excess debt beyond the amount required to support its operations and amounts to support its on-
balance sheet securitizations.
In addition, Ford Credit adds its minority interests to its financial statement equity because all of the debt of such
consolidated entities is included in its total debt. Ford Credit makes fair value hedge accounting adjustments to its assets,
debt and equity positions to reflect the impact of interest rate instruments Ford Credit uses in connection with its term-debt
issuances and securitizations. The fair value hedge accounting adjustments vary over the term of the underlying debt and
securitized funding obligations based on changes in market interest rates. Ford Credit generally repays its debt
obligations as they mature. As a result, Ford Credit excludes the impact of the fair value hedge accounting adjustments
on both the numerator and denominator in order to exclude the interim effects of changes in market interest rates.
Accordingly, the managed leverage measure provides Ford Credit's investors with meaningful information regarding
management's decision-making processes.
Ford Credit plans its managed leverage by considering prevailing market conditions and the risk characteristics of its
business. At December 31, 2006, Ford Credit's managed leverage was 11.4 to 1, compared with 12.3 to 1 a year ago. In
2006, Ford Credit paid cash dividends of $1.35 billion. To further enhance future funding flexibility, Ford Credit has
suspended regular dividend payments beginning in 2007. Correspondingly, Ford Credit expects a continued reduction in
its managed leverage.
Total Company
Stockholders' Equity. Our stockholders' equity was negative $3.5 billion at December 31, 2006, down $16.9 billion
compared with December 31, 2005. The decrease primarily reflected 2006 net losses and recognition of previously
unamortized changes in the funded status of our defined benefit postretirement plans (such as assumption changes and
benefit plan changes) as required by the implementation of Statement of Financial Accounting Standards ("SFAS")
No. 158, offset partially by foreign currency translation adjustments. For additional discussion of SFAS No. 158 and its
impact on our financial position, see Note 23 of the Notes to the Financial Statements. For additional discussion of
foreign currency translation adjustments, see Note 2 of the Notes to the Financial Statements.
Credit Ratings
Our short- and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical
rating organizations ("NRSROs") by the Securities and Exchange Commission ("SEC"):
• Dominion Bond Rating Service Limited ("DBRS");
• Fitch, Inc. ("Fitch");
• Moody’s Investors Service, Inc. ("Moody’s"); and
• Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P").
In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating
agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Their ratings of us
are based on information provided by us and other sources. Credit ratings are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may
have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each
rating agency. Lower credit ratings generally result in higher borrowing costs and reduced access to capital markets. The
NRSROs have indicated that our lower ratings are primarily a reflection of the rating agencies' concerns regarding our
automotive cash flow and profitability, declining market share, excess industry capacity, industry pricing pressure and
rising health care costs.