Ford 2011 Annual Report Download - page 67

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2011 Annual Report 65
Ford Credit plans its managed leverage by considering prevailing market conditions and the risk characteristics of its
business. At December 31, 2011, Ford Credit's managed leverage was 8.3 to 1 compared with 6.7 to 1 at
December 31, 2010, significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support
Agreement with us. By mid-decade, Ford Credit expects its leverage to be in the range of 10 - 11 to 1. In 2011, Ford
Credit paid $3 billion in distributions to its parent.
Securitization Transactions by Ford Credit
Securitization. Ford Credit securitizes finance receivables and net investment in operating leases through a variety of
programs, using amortizing, variable funding, and revolving structures. Ford Credit also sells finance receivables in
structured financing transactions. Due to the similarities between securitization and structured financing, Ford Credit
refers to structured financings as securitization transactions. Ford Credit's securitization programs are targeted to many
different institutional investors in both public and private transactions in capital markets worldwide. Ford Credit completed
its first securitization transaction in 1988, and regularly securitizes assets, purchased or originated, in the United States,
Canada, Mexico, and European countries.
All of Ford Credit's securitization transactions involve sales to consolidated entities or Ford Credit maintains control
over the assets, and, therefore, the securitized assets and related debt remain on its balance sheet. All of Ford Credit's
securitization transactions since the first quarter of 2007 have been on-balance sheet transactions. Securitization
transactions have an effect on Ford Credit's financial condition, operating results, and liquidity.
Ford Credit securitizes its assets because the securitization market provides it with a lower cost source of funding
compared with unsecured debt given Ford Credit's present credit ratings, and it diversifies Ford Credit's funding among
different markets and investors. In the United States, Ford Credit is, in most cases, able to obtain funding in two days for
its unutilized capacity in most of its committed liquidity programs. New programs and new transaction structures typically
require substantial development time before coming to market.
In a securitization transaction, the securitized assets are generally held by a bankruptcy-remote special purpose entity
("SPE") in order to isolate the securitized assets from the claims of Ford Credit's other creditors and ensure that the cash
flows on the securitized assets are available for the benefit of securitization investors. As a result, payments to
securitization investors are based on the creditworthiness of the securitized assets and any enhancements, and not on
Ford Credit's creditworthiness. 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 rating agencies that rate them.
Securitization SPEs have limited purposes and generally are only permitted to purchase the securitized assets, issue
asset-backed securities, and make payments on the securities. Some SPEs, such as certain trusts that issue securities
backed by retail installment sale contracts, only issue a single series of securities and generally are dissolved when those
securities have been paid in full. Other SPEs, such as the trusts that issue securities backed by wholesale receivables,
issue multiple series of securities from time to time and are not dissolved until the last series of securities is paid in full.
Ford Credit's use of SPEs in its securitization transactions is consistent with conventional practices in the consumer
asset-backed securitization industry. Ford Credit sponsors the SPEs used in all of its securitization programs with the
exception of bank-sponsored conduits. None of Ford Credit's officers, directors, or employees holds any equity interests
in its SPEs or receives any direct or indirect compensation from the SPEs. These SPEs do not own Ford Credit's shares
or shares of any of its affiliates.
In order to be eligible for inclusion in a securitization transaction, each asset must satisfy certain eligibility criteria
designed for the specific transaction. For example, for securitization transactions of retail installment sale contracts, the
selection criteria may be based on factors such as location of the obligor, contract term, payment schedule, interest rate,
financing program, the type of financed vehicle, and whether the contracts are active and in good standing (e.g., when the
obligor is not more than 30-days delinquent or bankrupt). Generally, Ford Credit selects the assets to be included in a
particular securitization randomly from its entire portfolio of assets that satisfy the applicable eligibility criteria.
Ford Credit provides various forms of credit enhancements to reduce the risk of loss for securitization investors.
Credit enhancements include over-collateralization (when the principal amount of the securitized assets exceeds the
principal amount of related asset-backed securities), segregated cash reserve funds, subordinated securities, and excess
spread (when interest collections on the securitized assets exceed the related fees and expenses, including interest
payments on the related asset-backed securities). Ford Credit may also provide payment enhancements that increase
the likelihood of the timely payment of interest and the payment of principal at maturity. Payment enhancements include
yield supplement arrangements, interest rate swaps, and other hedging arrangements, liquidity facilities, and certain cash
deposits.