FORD MOTOR CREDIT CO LLC 10-K 2005
Documents found in this filing:
Ford Motor Credit Company
for the year ended
December 31, 2004
Filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
TABLE OF CONTENTS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes o No þ
As of March 8, 2005, the registrant had outstanding 250,000 shares of Common Stock. No voting stock of the registrant is held by non-affiliates of the registrant.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
EXHIBIT INDEX APPEARS AT PAGE 58
ITEM 1. BUSINESS
Ford Motor Credit Company (referred to herein as Ford Credit, the Company, we, our or us) was incorporated in Delaware in 1959. We are an indirect, wholly owned subsidiary of Ford Motor Company (Ford). Our principal executive offices are located at One American Road, Dearborn, Michigan 48126, and our telephone number is (313) 322-3000.
Our annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) are available free of charge through our website located at www.fordcredit.com/investorcenter/. These reports and our current reports on Form 8-K can be found on the SECs website located at www.sec.gov.
Products and Services. We offer a wide variety of automotive financing products to and through automotive dealers throughout the world. Our primary financing products fall into three categories:
We also service the finance receivables and leases we originate and purchase, make loans to Ford affiliates, purchase certain receivables of Ford and its subsidiaries and provide insurance services related to our financing programs.
We earn our revenue primarily from:
Geographic Scope of Operations and Segment Information. We conduct our financing operations directly or through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. We divide our business segments based on geographic regions: Ford Credit North America (North America Segment) and Ford Financial International (International Segment). The North America Segment includes our operations in the United States and Canada. The International Segment includes our operations in all other countries in which we do business directly and indirectly. Additional financial information regarding our operations by business segments and operations by geographic regions are shown in Note 16 of our Notes to the Financial Statements.
We do business in all 50 states of the United States through about 130 dealer automotive financing branches and seven regional service centers. We do business in all provinces in Canada through 14 dealer automotive financing branches and two regional service centers. Our United States operations accounted for 68% and 69% of our total managed receivables at year-end 2004
ITEM 1. BUSINESS (Continued)
and 2003, respectively, and our Canadian operations accounted for about 7% and 6% of our total managed receivables in 2004 and 2003, respectively.
In the United States and Canada, under the Ford Credit brand name, we provide financing services to and through dealers of Ford, Lincoln and Mercury brand vehicles and non-Ford vehicles also sold by these dealers and their affiliates. We provide similar financial services under the Jaguar, Land Rover, Mazda and Volvo brand names to and through Jaguar, Land Rover, Mazda and Volvo dealers, respectively. Under the PRIMUS label, we provide financing services to Aston Martin and non-Ford dealers in the United States and Canada.
Our International segment includes operations in three main regions: Europe, Asia-Pacific and Latin America. Our Europe region is our largest international operation, accounting for 19% and 18% of our total managed receivables at year-end 2004 and 2003, respectively. Within the International segment, our Europe region accounted for 77% of our managed receivables in 2004 and 2003. Most of our European operations are managed through a U.K.-based subsidiary, FCE Bank plc (FCE), which operates in the United Kingdom and on a branch basis in 16 European countries. In addition, FCE has subsidiaries in the United Kingdom, Finland, Hungary, Poland and the Czech Republic that provide wholesale, leasing and retail vehicle financing. In our largest European markets, Germany and the United Kingdom, FCE offers most of our products and services under the Ford Credit/ Bank, Volvo Car Finance, Land Rover Financial Services, Jaguar Financial Services and Mazda Credit/ Bank brands. FCE generates most of our European revenue and contract volume from Ford Credit/ Bank brand products and services. FCE, through our Worldwide Trade Financing division, provides financing to dealers in countries where typically there is no established local Ford presence. In addition, other private label operations and outsourcing arrangements are in place in several markets in Central and Eastern Europe. We also offer financing in Germany and Sweden for Volvo brand vehicles through Volvo Auto Finanz Service Deutschland GmbH and Volvo Finans, a joint venture with Swedish Volvo dealers. We also have joint ventures in South Africa and Saudi Arabia that provide wholesale, leasing and retail vehicle financing.
In the Asia-Pacific region, we operate in Australia, Japan, Taiwan, Thailand and New Zealand. We have joint ventures with local financial institutions and other third parties in India, the Philippines and Indonesia. We maintain a presence in China through a representative office. The banking authority in China, the China Banking Regulatory Commission, has approved our initial application to provide auto financing in China and our final application is pending approval. In the Latin America region, we operate in Mexico, Puerto Rico, Brazil, Chile, Venezuela and Argentina.
The automotive financing business is highly competitive. Our principal competitors for retail and wholesale financing are:
We compete mainly on the basis of service and financing rates. A key foundation of our service is providing broad and consistent purchasing policies for retail installment sale and lease contracts and consistent support for dealer financing requirements across economic cycles. Through these
ITEM 1. BUSINESS (Continued)
policies we have built strong relationships with Fords dealer network that enhance our competitiveness. Our ability to provide competitive financing rates depends on effectively and efficiently originating, purchasing and servicing our receivables, and accessing the capital markets. We routinely monitor the capital markets and develop funding alternatives to maximize our competitive position. The integration of our financing services with Fords vehicle production and marketing plans gives us a competitive advantage in providing financing to Ford dealers and their customers. In addition, our size allows us to take advantage of economies of scale in both purchasing and servicing our receivables and leases.
No single company is a dominant force in the industry. Some of our bank competitors have developed credit aggregation systems that permit dealers to send, through a single standard system, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources. This process has resulted in greater competition based on financing rates. We, along with other automobile manufacturers affiliated finance companies, formed a joint venture in 2002, RouteOne LLC (RouteOne), that developed a similar credit application management system. RouteOne developed a web-based system that enables dealers and their finance sources, including automobile manufacturers affiliated finance companies, banks, and other financial institutions, to exchange credit application and decision information online. The system was launched in our United States branches during 2004 and rollout in Canada is scheduled for the first quarter of 2005.
Seasonal Variations. As a finance company, we own and manage a large portfolio of finance receivables and operating leases that are generated throughout the year and are collected over a number of years, primarily in fixed monthly payments. As a result, our overall financing revenues do not exhibit seasonal variations. However, throughout the automotive financing industry, charge-offs are typically higher in the first and fourth quarters of the year due to competing financial demands on customers and lower vehicle resale values.
The predominant share of our business consists of financing Ford vehicles and supporting Ford dealers. Any extended reduction or suspension of Fords production or sale of vehicles due to a decline in consumer demand, work stoppage, governmental action, negative publicity or other event, or significant changes to marketing programs sponsored by Ford, would have an adverse effect on our business. Additional information about Fords business, operations, production, sales and risks can be found in Fords Annual Report on Form 10-K for the year ended December 31, 2004 (Fords 2004 10-K Report), filed separately with the SEC and included as an exhibit to this report (without financial statements and exhibits).
Ford has sponsored special-rate financing programs available only through us. Similar programs may be offered in the future. Under these programs, Ford makes interest supplements or other support payments to us. These programs may increase our financing volume and share of financing sales of Ford vehicles. In each of 2004 and 2003, we recorded as financing revenue about $3.3 billion related to interest supplements and other payments received from Ford. For further discussion regarding interest supplements and other support costs earned from affiliated companies, see Note 15 of our Notes to the Financial Statements.
We provide financing services to retail customers through automotive dealers that have established relationships with us. Our primary business consists of purchasing retail installment sale and lease contracts for new and used vehicles mainly from dealers of Ford vehicles. In 2004, on a worldwide basis, we financed about 2.6 million vehicles through installment sales, and we financed
ITEM 1. BUSINESS (Continued)
about 519,000 vehicles through operating and finance leases. We report in our financial statements the receivables from customers under installment sale contracts and certain leases with fleet customers as finance receivables. We report in our financial statements most of our retail leases as operating leases with the capitalized cost of the vehicles recorded as depreciable assets. We report retail leases in our financial statements as net investment in operating leases. At December 31, 2004, our retail finance receivables net of allowances for credit losses totaled $81.7 billion and our net investment in operating leases was $21.9 billion.
In general, we purchase from dealers retail installment sale contracts and lease contracts that meet our credit standards. These contracts primarily relate to the purchase or lease of new vehicles, but some are for used vehicles. Dealers typically submit customer applications electronically to one of our branch offices. Some of the applications are automatically evaluated and either approved or rejected based on our origination scorecard and credit policy criteria. In other cases, our credit analysts evaluate applications using our written guidelines.
The amount we pay for a retail installment sale contract is based on a negotiated vehicle purchase price agreed to between the dealer and the retail customer, plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer applied to the purchase price. The net purchase price owed by the customer typically is paid over a specified number of months with interest at a fixed rate negotiated between the dealer and the retail customer. The dealer may retain a portion of the finance charge.
We offer a variety of retail installment sale financing products. We generally purchase retail installment sale contracts with terms ranging from 12 to 72 months. The average original term of our retail installment sale contracts was 58 months in the United States in 2004, compared with 59 months in 2003.
In the United States, the average amount financed for new Ford, Lincoln, and Mercury brand vehicles under retail installment sale contracts was $24,000 in 2004, compared with $25,088 in 2003. The corresponding average monthly payment was about $505 in 2004 and $510 in 2003.
Some of our retail installment sale contracts have non-uniform payment periods and payment amounts to accommodate special cash flow situations. We also offer a Red Carpet Option (RCO) program under which the retail customer may finance their vehicle with an installment sale contract with a series of relatively lower monthly payments followed by paying the amount remaining in a single balloon payment. The RCO customer can satisfy the balloon payment obligation by payment in full of the amount owed, by refinancing the amount owed, or by returning the vehicle to us and paying additional charges for mileage and excess wear and use, if any. We sell vehicles returned to us to other Ford and non-Ford dealers through the same auction process that we use for repossessed vehicles. Customers who choose our RCO program may also qualify for special-rate financing offers from Ford. Our United States RCO program is available in Texas, Connecticut, New Jersey, New York, Rhode Island and Pennsylvania. We may consider offering this product instead of lease financing in other states.
We hold a security interest in the vehicles purchased through retail installment sale contracts. This security interest provides us certain rights and protections. As a result, if our collection efforts fail to bring a delinquent customers payments current, we generally can repossess the customers vehicle, after satisfying local legal requirements, and sell it at auction. The customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses. We require retail customers to carry fire, theft and collision insurance on financed vehicles.
ITEM 1. BUSINESS (Continued)
We offer leasing plans to retail customers through our dealers. Our highest volume retail leasing plan is called Red Carpet Lease, which is offered in the United States and Canada through dealers of Ford, Lincoln and Mercury brands. We offer similar lease plans through dealers of other Ford brands (Jaguar, Land Rover, Mazda and Volvo) and through a limited number of non-Ford dealers under the PRIMUS brand. Under these plans, dealers originate the leases and offer them to us for purchase. Upon our purchase of a lease, we take ownership of the lease and title to the leased vehicle from the dealer. After we purchase a lease from a dealer, that dealer generally has no further obligation to us in connection with the lease. The customer is responsible for properly maintaining the vehicle and is obligated to pay for excess wear and use as well as excess mileage, if any. At the end of the lease, the customer has the option to purchase the vehicle for the customer purchase option price specified in the lease contract, or return the vehicle to the dealer. If the customer returns the vehicle to the dealer, the dealer may buy the vehicle from us or return it to us. We sell vehicles returned to us to other Ford and non-Ford dealers through the same auction process that we use for repossessed vehicles.
The amount we pay to a dealer for a retail lease, also called the acquisition cost, is based on the negotiated vehicle price agreed to by the dealer and the retail customer plus any additional products, such as insurance and extended service plans, that are included in the contract, less any vehicle trade-in allowance or down payment from the customer. The customer makes monthly lease payments based on the acquisition cost less the contractual residual value of the vehicle, plus lease charges. Some of our lease programs, such as our Red Carpet Lease Advance Payment Plan, provide certain pricing advantages to customers who make all or some monthly payments at lease inception or purchase refundable higher mileage allowances. We require lease customers to carry fire, theft, liability and collision insurance on leased vehicles. In the case of a contract default and repossession, the customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses.
In the United States, retail operating lease terms for new Ford, Lincoln and Mercury brand vehicles range primarily from 12 to 48 months. In 2004, the average original lease term was 34 months compared with 35 months in 2003; the average monthly payment was about $440 in 2004 and $470 in 2003.
We also offer vehicle financing programs to commercial customers including leasing companies, daily rental companies, government entities and fleet customers. These financings include both lease plans and installment purchase plans and are generally for terms of 12 to 84 months. The financing obligations are collateralized by perfected security interests on financed vehicles in almost all instances and, where appropriate, an assignment of rentals under any related leases. At the end of the finance term, a lease customer may be required to pay us any shortfall between the fair market value and the specified end of term value of the vehicle. If the fair market value of the vehicle at the end of the finance term exceeds the specified end of term value, we may pay the lease customer the excess amount. In the United States, these financings totaled about $1.6 billion as of December 31, 2004, and are included in retail finance receivables and net investment in operating leases in our financial statements.
We offer a wholesale financing program for qualifying dealers to finance new and used vehicles held in inventory. We generally finance the vehicles wholesale invoice price for new vehicles and up to 100% of the dealers purchase price for used vehicles. Dealers generally pay a floating interest rate on wholesale loans based on the prime rate. The dealer pays off each wholesale receivable as
ITEM 1. BUSINESS (Continued)
the related vehicle is sold or leased. In the United States in 2004, the average wholesale receivable was outstanding for 89 days, excluding the time the vehicle was in transit from the assembly plant to the dealership. In 2004, we financed about 5 million vehicles worldwide through wholesale financing. At December 31, 2004, our wholesale portfolio totaled $23.8 billion net of allowance for credit losses. Our wholesale financing program includes financing of large multi-brand national dealer groups that are some of our largest wholesale customers based on the amount financed.
When a dealer uses our wholesale financing program to purchase vehicles we obtain a security interest in the vehicles and, in many instances, other assets of the dealer. Our subsidiary, The American Road Insurance Company, provides insurance for vehicle damage and theft of vehicles held in dealer inventory that are financed by us.
For each year since 2002, we have provided about 84% of the wholesale financing on new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States and about 97% of the wholesale financing on new Ford brand vehicles acquired by dealers in Europe.
We make loans to dealers for facilities improvements, working capital and for the purchase and financing of dealership real estate. For dealers in the United States and Canada, these loans totaled about $2.9 billion at December 31, 2004 and were included in other finance receivables in our financial statements. These loans typically are secured by mortgages on real estate, security interests in other dealership assets and sometimes personal guarantees of the individual owners of the dealership.
We also purchase certain receivables generated by divisions and affiliates of Ford, primarily in connection with the delivery of vehicle inventories from Ford, the sale of parts and accessories by Ford to dealers and the purchase of other receivables generated by Ford. At December 31, 2004, these purchased receivables totaled about $3.1 billion and are included in net finance receivables.
We actively market our financing products and services to automotive dealers and customers. Through personal sales contacts, targeted advertisements in trade publications, participation in dealer-focused conventions and organizations and support from manufacturers, we seek to demonstrate to dealers the value of entering into a business relationship with us. We base our marketing strategy on our belief that we can better assist dealers in achieving their sales, financial and customer satisfaction goals by being a stable, committed finance source with knowledgeable automotive and financial professionals offering personal attention and interaction. We demonstrate our commitment to dealer relationships with a variety of materials, measurements and analyses showing the advantages of a full range of automotive financing products that allows consistent and predictable single source financing. From time to time, we promote increased dealer transactions through incentives, bonuses, contests and selected program and rate adjustments.
We promote our retail financing products primarily through pre-approved credit offers to prospective customers, point-of-sale information, ongoing communications and contacts with existing customers. Our communications to these customers promote the advantages of our financing products, the availability of special plans and programs and the benefits of affiliated products, such as extended warranties, service plans, insurance coverage gap protection and excess wear and use waivers. In addition, we emphasize the quality of our customer service and the ease of making payments and transacting business with us. For example, through the Ford Credit North America web site, a customer can make inquiries, review an account balance, examine current incentives, schedule an electronic payment or qualify for a pre-approved credit offer.
ITEM 1. BUSINESS (Continued)
We also market our non-consumer financial services described above in Other Retail Financing with a specialized group of employees who make direct sales calls on dealers, and, often at the request of such dealers, on potential high-volume commercial customers. This group also uses various materials to explain our flexible programs and services specifically directed at the needs of commercial and fleet vehicle customers.
General. After we purchase retail installment sale contracts and leases from dealers and other customers, we manage the receivables during their contract terms. This management process is called servicing. We service all contracts that we originate or acquire. Our servicing duties include the following:
Service Center Locations. We have 9 regional service centers in North America and 2 regional service centers in Europe.
Our North American regional service centers are located in:
Each of these service centers generally services customers located in their region, but all of our North American service centers are electronically linked and workload can be allocated across service centers.
We also have four specialty service centers in North America that focus on specific servicing activities:
In Europe, we have centralized customer servicing activities in St. Albans, England to support our U.K. operations and customers, and in Cologne, Germany to support our German operations and customers. In smaller countries, we provide servicing through our local branches.
ITEM 1. BUSINESS (Continued)
Customer Payment Operations. In the United States and Canada, customers are directed in their monthly billing statements to mail payments to a bank for deposit in a lockbox account. Customers may also make payments through electronic payment services, a direct debit program or a telephonic payment system.
Servicing Activities Consumer Credit. We design our collection strategies and procedures to keep accounts current and to collect on delinquent accounts. We employ a combination of proprietary and non-proprietary tools to assess the probability and severity of default for all of our receivables and leases and implement our collection efforts based on our determination of the credit risk associated with each customer. As each customer develops a payment history, we use an internally developed behavioral scoring model to assist in determining the best collection strategies. Based on data from this scoring model, we group contracts by risk category for collection. Our centralized collection operations are supported by state-of-the-art auto-dialing technology and proprietary collection and workflow operating systems. Our U.S. systems also employ a web-based network of outside contractors who support the repossession process. Through our auto-dialer program and our monitoring and call log systems, we target our efforts on contacting customers about missed payments and developing satisfactory solutions to bring accounts current.
Outsourced Operations. We engage vendors to perform many of our servicing processes. These processes include applying monthly payments from customers, monitoring the perfection of security interests in financed vehicles, monitoring insurance coverage on lease vehicles, imaging of contracts and electronic data file maintenance, generation of retail and lease billing statements, telephonic payment systems for retail customers, the handling of some inbound customer service calls and the recovery of deficiencies in selected accounts.
Payment Extensions. At times, we offer payment extensions to customers who have encountered temporary financial difficulty that limits their ability to pay as contracted. A payment extension allows the customer to extend the term of the contract, usually by paying a fee that is calculated in a manner specified by law. Following a payment extension, the customers account is no longer delinquent. Before agreeing to a payment extension, the service representative reviews the customers payment history, current financial situation and assesses the customers desire and capacity to make future payments. The service representative decides whether the proposed payment extension complies with our policies and guidelines. Service center managers review, and generally must approve, payment extensions outside these guidelines.
Repossessions and Auctions. We view repossession of a financed or leased vehicle as a final step that we undertake only after all other collection efforts have failed. We sell repossessed vehicles at auction and apply the proceeds to the amount owed on the customers account. At our National Recovery Center, we continue to attempt collection of any deficient amounts until the account is paid in full, we obtain mutually satisfactory payment arrangements with the debtor or we determine that the account is uncollectible.
Fords Vehicle Remarketing Department, in conjunction with our regional service centers and our National Recovery Center, manages the sale of repossessed vehicles and returned leased vehicles. Repossessed vehicles are reported in other assets on our balance sheet at values that approximate expected net auction proceeds. We inspect and recondition the vehicle to maximize the net auction value of the vehicle. Vehicles are then offered for sale through open auctions, in which any licensed dealer can participate, and closed auctions, in which only Ford, Lincoln and Mercury dealers may participate.
Wholesale and Commercial. We require dealers to submit monthly financial statements that we monitor for potential credit deterioration. We assign an evaluation rating to each dealer and we perform physical audits of vehicle inventory periodically, with more frequent audits for higher risk dealers. We monitor dealer inventory financing payoffs daily to detect deviations from typical
ITEM 1. BUSINESS (Continued)
repayment patterns and take appropriate actions. Within the United States and Canada, ten commercial lending offices provide services to fleet purchasers, leasing companies, daily rental companies and other commercial customers. We generally review our exposure under these credit arrangements at least annually. In our international markets, this business is managed within the head office of the local market area.
We conduct insurance operations primarily through The American Road Insurance Company (TARIC) and its subsidiaries in the United States and Canada and through various other insurance subsidiaries outside the United States and Canada. TARIC offers a variety of products and services, including:
We also offer various Ford branded insurance products throughout the world underwritten by non-affiliated insurance companies from which we receive fee income but the underwriting risk remains with the non-affiliated insurance companies. In addition, TARIC provides to Ford and its subsidiaries various types of surety bonds, including bonds generally required as part of any appeals of litigation, financial guarantee bonds and self-insurance workers compensation bonds. Our insurance business generated approximately 1% of our total revenues in 2004 and 2003.
At December 31, 2004, we had 17,424 full-time employees, and 1,380 part-time and agency personnel. Most of our employees are salaried, and most are not represented by a union. We consider employee relations to be satisfactory.
As a finance company, we are highly regulated by the governmental authorities in the locations where we operate.
Within the United States, our operations are subject to regulation, supervision and licensing under various federal, state and local laws and regulations.
Federal Regulation. We are subject to extensive federal regulation, including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective borrowers and lessees in consumer retail and lease financing transactions and prohibit discriminatory credit practices. The principal disclosures required under the Truth-in-Lending Act for retail finance transactions include the terms of repayment, the amount financed, the total finance charge and the annual percentage rate. For retail lease transactions, we are required to disclose the amount of payments at lease inception, the terms for payment, and information about lease charges, insurance, excess mileage and liability on early termination. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on a variety of factors, including race, color, sex, age or marital status. Pursuant to the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for being denied. In addition, any of the credit scoring systems we use during the application process or other
ITEM 1. BUSINESS (Continued)
processes must comply with the requirements for such systems under the Equal Credit Opportunity Act. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a consumer credit report obtained from a national credit bureau and sets forth requirements related to identity theft, privacy and enhanced accuracy in credit reporting content. We are also subject to the Soldiers and Sailors Civil Relief Act that requires us to reduce the interest rate charged on transactions with customers who subsequently enter into full-time service with the military and limits our ability to collect future payments from lease customers who terminate their lease early. In addition, we are subject to other federal regulation, including the Gramm-Leach-Bliley Act, that requires us to maintain privacy with respect to certain consumer data in our possession and to communicate periodically with consumers on privacy matters.
State Regulation Licensing. In most states, a consumer credit regulatory agency regulates and enforces laws relating to finance companies. Rules and regulations generally provide for licensing of finance companies, limitations on the amount, duration and charges, including interest rates, that can be included in finance contracts, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors rights. We must renew these licenses periodically. Moreover, several states have laws that limit interest rates on consumer financing. In certain states, we are subject to periodic examination by state regulatory authorities. In periods of high interest rates, these rate limitations could have an adverse effect on our operations if we were unable to purchase retail installment sale contracts with finance charges that reflect our increased costs.
State Regulation Repossessions. To mitigate our credit losses, sometimes we repossess a financed or leased vehicle. Repossessions are subject to prescribed legal procedures, including peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed vehicle and return of personal items to the customer. Some states provide the customer with reinstatement or redemption rights that require us to return a repossessed vehicle to the customer in certain circumstances. Our ability to sell a repossessed vehicle is restricted if a customer declares bankruptcy.
In some countries outside the United States, some of our subsidiaries, including FCE, are regulated banking institutions and are required, among other things, to maintain minimum capital reserves. FCE is authorized as a deposit taking business and insurance intermediary under the Financial Services and Markets Act of 2000 and is regulated by the U.K. Financial Services Authority (FSA). FCE also holds a standard license under the U.K. Consumer Credit Act of 1974. Since 1993, FCE has obtained authorizations from the Bank of England (which role is now undertaken by the FSA) pursuant to the Second Banking Consolidation Directive entitling it to operate on a branch basis in 16 European countries. In many other locations where we operate, governmental authorities require us to obtain licenses to conduct our financing business.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all laws and regulations applicable to us and our operations. Failure to satisfy those legal and regulatory requirements could have a material adverse effect on our operations, financial condition and liquidity. Further, the adoption of new laws or regulations, or the revision of existing laws and regulations, could have a material adverse effect on our operations, financial condition and liquidity.
We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. Through our governmental relations efforts, we also attempt to participate
ITEM 1. BUSINESS (Continued)
in the legislative and administrative rule-making process on regulatory initiatives that impact finance companies. Our ongoing compliance efforts have not had a material adverse effect on our operations, financial condition or liquidity.
On October 22, 2004, President Bush signed into law The American Jobs Creation Act of 2004 (the Act). The most significant component of the Act was the repeal of the extraterritorial income (ETI) exclusion and the replacement of ETI with a domestic deduction for a range of broadly defined domestic production activities. The Act also provides for a one-year period to repatriate certain foreign earnings at a special tax rate. The provisions of the Act are not expected to have a material impact on future earnings.
We have a profit maintenance agreement with Ford that requires Ford to maintain our consolidated income before income taxes and net income at specified minimum levels. In addition, we have an agreement to maintain a minimum control interest in FCE and to maintain FCEs net worth above a minimum level. No payments were made under either of these agreements during the 2002 through 2004 periods.
We formally documented our long-standing business practices with Ford in an agreement dated October 18, 2001, a copy of which was filed with the SEC on that date. The principal terms of this agreement include the following:
More information about transactions between us and Ford and other affiliates, is contained in Note 15 of our Notes to the Financial Statements, Business Overview, Business Retail Financing; Business Other Financing and the description of Fords business in Fords 2004 10-K Report included as an exhibit to this report.
We own our world headquarters in Dearborn, Michigan. We lease our corporate offices in Brentwood, England from an affiliate of Ford. Most of our automotive finance branches and service centers are located in leased properties. The continued use of any of these leased properties is not material to our operations. At December 31, 2004, our total obligation under leases of real property was about $220 million.
We are subject to legal actions, governmental investigations and other proceedings and claims relating to state and federal laws concerning finance and insurance, employment-related matters and other contractual relationships. Some of these matters are class actions or are seeking class action status. Some of these matters may involve claims for compensatory, punitive or treble damages and attorneys fees in very large amounts, or request other relief which, if granted, would require very large expenditures. Our significant pending matters are summarized below:
SEC Inquiry of Ford Money Market Account Program. In January 2004, the Division of Enforcement of the Securities and Exchange Commission (the SEC) requested information from us relating to the offering of debt securities under our Ford Money Market Account (FMMA) program. Under the FMMA program, we offer floating rate variable denomination demand debt securities to individual investors. Following the submission of information, we and the SEC Staff have been in discussions about resolving concerns the Staff identified regarding the use of certain marketing and solicitation materials. In March 2005, we made a settlement offer that included, with us neither admitting nor denying the Staffs allegations, the issuance of a Cease and Desist Order requiring that we comply with Section 5 of the Securities Act of 1933 in connection with all marketing and solicitation materials. The terms of the tentative settlement also require us to undertake to discontinue or change certain aspects of our marketing practices relating to the FMMA program and to pay the SEC approximately $760,000 in disgorgement (based on cost savings relating to those practices). The SEC Staff has indicated that it will recommend this settlement offer to the Commission. The tentative settlement is subject to approval by the full Commission of the SEC.
Fair Lending Class Actions. Jones v. Ford Motor Credit Company is pending in federal court in New York. Plaintiffs allege that our pricing practices discriminate against African-Americans. Plaintiffs motion for class certification is pending. A second fair lending case, Claybrook v. PRIMUS, is pending in federal court in Tennessee. The plaintiffs in Claybrook have made similar allegations concerning PRIMUS accounts. The class in Claybrook was certified on January 18, 2005, and trial began on March 1, 2005.
Litigation is subject to many uncertainties and the outcome is not predictable. It is reasonably possible that either of the matters described above could be decided unfavorably to us. Although the amount of liability at December 31, 2004 with respect to these matters cannot be ascertained, we believe that any resulting liability should not materially affect our operations, financial condition and liquidity.
In addition, any litigation, investigation, proceeding or claim against Ford that results in Ford incurring significant liability, expenditures or costs could also have a material adverse effect on our operations, financial condition and liquidity. For a discussion of pending cases against Ford, see Item 3 in Fords 2004 Form 10-K Report.
At December 31, 2004, all shares of our common stock were owned by Ford Holdings, LLC, a wholly owned subsidiary of Ford. We did not issue or sell any equity securities during 2004, and there is no market for our stock. We paid cash dividends of $4.3 billion and $3.7 billion in 2004 and 2003, respectively. For a discussion of our dividend policy, see the Leverage section in Item 7.
ITEM 6. SELECTED FINANCIAL DATA
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
As an indirect, wholly owned subsidiary of Ford, our primary focus is to profitably support the sale of Ford vehicles. The principal factors that influence our earnings are the amount and mix of finance receivables and net investment in operating leases and financing margins. The performance of these receivables and leases over time, mainly through the impact of credit losses and variations in the residual value of leased vehicles, also affects our earnings.
The amount of our finance receivables and net investment in operating leases depends on many factors, including:
For finance receivables, financing margin equals the difference between revenue earned on finance receivables and the cost of borrowed funds. For operating leases, financing margin equals revenue earned on operating leases, less depreciation expense and the cost of borrowed funds. Interest rates earned on most receivables and rental charges on operating leases generally are fixed at the time the contracts are originated. On some receivables, primarily wholesale financing, we charge interest at a floating rate that varies with changes in short-term interest rates.
We review our business performance from several perspectives, including:
We analyze our financial performance primarily on an on-balance sheet and managed basis. We retain interests in receivables sold in off-balance sheet securitizations, and with respect to subordinated retained interests, we have credit risk. As a result, we evaluate credit losses, receivables and leverage on a managed basis as well as on an on-balance sheet basis. In contrast, we do not have the same financial interest in the performance of receivables sold in whole-loan sale transactions, and as a result we generally review the performance of our serviced portfolio only to evaluate the effectiveness of our origination and collection activities. To evaluate the performance of
these activities, we monitor a number of measures, such as repossession statistics, losses on repossessions and the number of bankruptcy filings.
We measure the performance of our North America segment and our International segment primarily on an income before income taxes basis, after excluding the impact to earnings from hedge ineffectiveness, and other adjustments in applying Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities, because our risk management activities are carried out on a centralized basis at the corporate level, with only certain elements allocated to our two segments. For further discussion regarding our segments, see Note 16 of our Notes to the Financial Statements.
In 2004, our origination strategy for the purchase of retail installment sale contracts and lease contracts from dealers continued to focus on financing Ford brand vehicles. In 2004, we continued to upgrade our proprietary risk assessment tools used in the origination process by refining assumptions to better align our pricing with our risk for each applicant. In North America, we announced in 2004 a plan to create an integrated sales platform in the United States and Canada over the next two years that would support sales activities for Ford Credit, Volvo Car Finance, PRIMUS, (Jaguar Credit, Land Rover Capital Group, Mazda Credit) and Commercial Lending Services. The plan included the consolidation of regional sales offices and an integration of branch locations. At December 31, 2004, the new regional structure was complete and the branch integration was on schedule. This integrated sales platform will allow us to provide expanded dealer support with longer operating hours as well as provide for dedicated brand managers located on-site to support each of the automotive brands. These actions will improve the process excellence of our origination activity in a manner that will improve cost efficiency.
Our servicing strategy is to improve efficiency and collections effectiveness by continually upgrading our processes while at the same time enhancing customer satisfaction and loyalty. During 2004, we further increased the commonality of our business processes and information technology platforms and introduced other enhancements to increase efficiency and effectiveness. In North America, for example, we enhanced our collection modeling capabilities to allow for more focused collection activity on high-risk accounts and refined a risk-based staffing model to ensure collection resources are aligned with portfolio risk. A common collection system was launched throughout our North American service centers. These and other process improvements, and the gradual improvement in the U.S. economy, resulted in us substantially lowering credit losses and delinquencies in 2004.
Our funding strategy is to maintain liquidity and access to diverse funding sources that are cost effective. We continue to have considerable flexibility between the mix of unsecured debt and asset-backed securitization issuance to meet our funding requirements. We continue to meet a significant portion of our funding requirements through securitizations because of the stability of the market for asset-backed securities, their lower costs compared with unsecured debt at our present credit ratings and the diversity of funding sources they provide. In recent years, lower credit ratings generally have resulted in higher borrowing costs and reduced access to capital markets. Our credit ratings are closely associated with the credit ratings of Ford, which have been lowered in the last several years. These lower credit ratings are primarily a reflection of concerns regarding Fords automotive cash
flow and profitability, declining market share, excess industry capacity, industry pricing pressure and rising healthcare costs. As our credit ratings have declined, asset-backed funding programs have become more cost-effective compared with unsecured funding programs, and allow us access to a larger investor base. As a result of our funding strategy and the reduction in our managed receivables, our lower credit ratings have not had a material impact on our ability to fund our operations.
During the fourth quarter of 2004, we committed to a plan to sell Triad Financial Corporation, our operation in the United States that specializes in automobile retail installment sales contracts with borrowers who generally would not be expected to qualify, based on their credit worthiness, for traditional financing sources such as those provided by commercial banks or automobile manufacturers affiliated finance companies. We expect to complete the sale of this business during 2005 for an amount approximately equal to the recorded book value. We have reported this business as discontinued/held-for-sale under SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, for all periods shown.
During 2004, we completed the sale of AMI Leasing and Fleet Management Services, our operation in the United States that offered full service car and truck leasing.
The following discussion of our results in Items 7 and 7A excludes the results of these discontinued/held-for-sale operations, as defined by SFAS No. 144, and are described in Note 13 of the Notes to the Financial Statements.
In the fourth quarter of 2004, earnings were up $73 million compared with a year ago. Our income from continuing operations before income taxes was up $65 million compared with a year ago. The increase in earnings primarily resulted from improved credit loss performance.
Results of our operations by business segment for the fourth quarter of 2004 and 2003 are shown below:
North America segment income from continuing operations before income taxes in the fourth quarter of 2004 was up $146 million compared with the fourth quarter of 2003. This increase primarily reflected improved credit loss performance, which primarily resulted from fewer repossessions and a lower average loss per repossession.
International segment income from continuing operations before income taxes in the fourth quarter of 2004 was down $8 million compared with the fourth quarter of 2003. This decrease primarily reflected the impairment of certain unconsolidated investments in our Asia-Pacific region, offset partially by favorable exchange (weaker dollar) in Europe, and recognition of a value-added tax refund in the United Kingdom.
Income from continuing operations before income taxes in the unallocated/eliminations category in the fourth quarter of 2004 was down $73 million compared with the fourth quarter of 2003. The decrease primarily reflected a reduction in the favorable market valuation of derivative instruments and associated exposures.
In 2004, earnings were up $1,045 million compared with a year ago. Income from continuing operations before income taxes was up $1,475 million compared with a year ago. The increase in earnings primarily reflected improved credit loss performance and improved leasing results.
Results of our operations by business segment for 2004 and 2003 are shown below:
North America segment income from continuing operations before income taxes in 2004 was up $1,374 million compared with 2003. This increase primarily reflected improved credit loss performance and improved leasing results, offset partially by lower income related to sales of receivables. The improved credit loss performance primarily resulted from fewer repossessions and a lower average loss per repossession. The improvement in leasing results primarily reflected higher used vehicle prices and a reduction in the percentage of vehicles returned to us at lease termination. The lower income related to sales of receivables primarily reflected lower sales of receivables and the impact of lower outstanding off-balance sheet receivables.
International segment income from continuing operations before income taxes in 2004 was up $118 million compared with 2003. This increase is more than explained by favorable exchange (weaker dollar) in Europe and Asia-Pacific, improved operating costs in Europe, and the sale of the full-service leasing portfolios in the United Kingdom, Italy, Switzerland and Spain.
Income from continuing operations before income taxes in the unallocated/eliminations category in 2004 was down $17 million compared with 2003. The decrease primarily reflected a reduction in the favorable market valuation of derivative instruments and associated exposures.
In 2003, earnings were up $583 million compared with a year ago. Income from continuing operations before income taxes in 2003 was up $977 million from 2002.
North America segment income from continuing operations before income taxes in 2003 was up $373 million compared with 2002. This increase primarily reflected improved credit loss performance, offset partially by the impact of lower average net receivables. The improved credit loss performance resulted in a lower allowance for credit losses consistent with our improving trend in charge-offs. The impact of lower average net receivables reflected lower retail installment and operating lease contract placement volumes.
International segment income from continuing operations before income taxes in 2003 was up $80 million compared with 2002. This increase primarily reflected a lower provision for credit losses, the favorable impact of currency exchange rates and higher wholesale volume.
Income from continuing operations before income taxes in the unallocated/eliminations category in 2003 was up $524 million compared with 2002. The improvement primarily reflected the net favorable market valuation of derivative instruments and associated exposures.
Placement Volume and Financing Share
Total worldwide financing contract placement volumes, excluding financing volumes for unconsolidated entities, for new and used vehicles are shown below:
Shown below are our financing shares of new Ford, Lincoln and Mercury brand vehicles sold by dealers in the United States and Ford brand vehicles sold by dealers in Europe. Also shown below are our wholesale financing shares of new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States, excluding fleet, and of new Ford brand vehicles acquired by dealers in Europe:
North America Segment. In the fourth quarter of 2004, our total financing contract placement volumes were 493,000 contracts, up 46,000 contracts compared with a year ago reflecting an increase in Ford, Lincoln and Mercury brand retail and lease financing. Similarly, financing share of new Ford, Lincoln and Mercury brand cars and light trucks sold by dealers in the United States was 48% compared with 39% a year ago, resulting from favorable Ford-sponsored marketing programs.
For the full year of 2004, our total financing contract placement volumes were 2.0 million contracts, down 66,000 compared with a year ago. This overall decrease reflected our reduction of used and non-Ford retail installment financing as a result of our continued focus on financing Ford brand vehicles.
International Segment. In the fourth quarter of 2004, our total financing contract placement volumes were 262,000, up 10,000 contracts compared with a year ago. For the full year of 2004, our
total financing contract placement volumes were 1.1 million contracts, down 32,000 compared with a year ago.
Finance Receivables and Operating Leases
Our financial condition is impacted significantly by the level of our receivables, which are shown below:
On-Balance Sheet Receivables. On-balance sheet net finance receivables and net investment in operating leases at December 31, 2004, were $132.7 billion, up $4.2 billion from year-end 2003.
At December 31, 2004 and 2003, about $16.9 billion and $14.3 billion, respectively, of finance receivables have been sold for legal purposes to consolidated securitization special purpose entities (SPEs). In addition, at December 31, 2004, interests in operating leases and the related vehicles of about $2.5 billion have been transferred for legal purposes to consolidated securitization SPEs. These receivables and interests in operating leases and the related vehicles are available only for
repayment of debt issued by those entities, and to pay other securitization investors and other participants; they are not available to pay our other obligations or the claims of our other creditors.
Securitized Off-Balance Sheet Receivables. Total securitized off-balance sheet receivables decreased $11.3 billion from a year ago.
Managed Receivables. Total managed receivables decreased $7.1 billion from a year ago. The decrease primarily reflected lower retail and operating lease contract placement volumes. The lower level of managed receivables reflected our continued focus on financing Ford brand vehicles.
Serviced Receivables. Serviced receivables include our managed receivables and receivables that we sold in whole-loan sale transactions. We continue to service the receivables sold in whole-loan sale transactions.
Credit risk is the possibility of loss from a customers failure to make payments according to contract terms. Credit risk has a significant impact on our business. We actively manage the credit risk of our consumer and non-consumer portfolios to balance our level of risk and return. The allowance for credit losses reflected on our balance sheet is our estimate of the credit losses for receivables and leases that are impaired at the points in time shown on our balance sheet.
Credit Loss Metrics
The following table shows actual credit losses net of recoveries (charge-offs) for our worldwide on-balance sheet, reacquired, securitized off-balance sheet and managed receivables, for the various categories of financing during the periods indicated. Reacquired receivables reflect the amount of receivables that resulted from the accounting consolidation of FCAR Owner Trust (FCAR) in the second quarter of 2003. The loss-to-receivables ratios, which equal charge-offs divided by the average amount of net receivables outstanding for the period, are shown for our on-balance sheet and managed portfolios.
Most of our charge-offs are related to retail installment sale and lease contracts. Charge-offs depend on the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, and the net resale price of repossessed vehicles and other losses associated with
impaired accounts and unrecoverable vehicles. We also incur credit losses on our wholesale loans, but default rates for these receivables historically have been substantially lower than those for retail installment sale and lease contracts.
Full Year 2004 Compared with Full Year 2003
On-Balance Sheet. In 2004, charge-offs for our on-balance sheet portfolio, excluding charge-offs related to reacquired receivables, declined $564 million, from a year ago primarily reflecting fewer repossessions and a lower average loss per repossession in our U.S. retail installment and operating lease portfolio. These improvements resulted from our emphasis on purchasing higher quality retail installment and lease contracts and enhancements to our collection practices. The on-balance sheet loss-to-receivables ratio declined to 1.10% in 2004 from 1.60% in 2003, primarily reflecting improvements in charge-offs as described above.
Securitized Off-Balance Sheet. In 2004, charge-offs for our securitized off-balance sheet portfolio declined $307 million from a year ago, primarily reflecting fewer repossessions and a lower average loss per repossession in our U.S. retail installment receivables and an overall lower level of securitized receivables resulting from lower off-balance sheet securitization activity in the last year.
Managed. In 2004, charge-offs for our managed portfolio declined $889 million from a year ago primarily reflecting improved performance in our U.S. retail installment and operating lease portfolio and an overall lower level of receivables resulting from lower retail and operating lease contract placement volumes. The loss-to-receivables ratio for our managed portfolio was 0.97%, down from 1.40% a year ago.
Full Year 2003 Compared with Full Year 2002
On-Balance Sheet. In 2003, charge-offs for our on-balance sheet portfolio declined $224 million from 2002, reflecting improved performance in our U.S. retail installment and operating lease portfolio. This decline was offset partially by the charge-off of 120-day delinquent accounts, which resulted in recognition of $106 million of credit losses, primarily in our wholesale receivables in Europe. As a result of lower on-balance sheet credit losses and our retention of securitized receivables on our balance sheet, which exhibit lower loss-to-receivable ratios than the average portfolio, our on-balance sheet loss-to-receivables ratio in 2003 was 1.60%, down from 1.63% in 2002.
Securitized Off-Balance Sheet. In 2003, charge-offs for our securitized off-balance sheet portfolio increased $106 million from a year ago, reflecting an increase in the average age of our securitized off-balance sheet receivables.
Managed. In 2003, charge-offs for our managed portfolio declined $26 million from a year ago, and the loss-to-receivables ratio for our managed portfolio was 1.40% in 2003, up from 1.31% the previous year, reflecting primarily lower retail receivables and net investment in operating leases resulting from lower placement volumes and whole-loan sale transactions.
The following table shows the loss-to-receivables, repossession, bankruptcy and delinquency statistics for our Ford, Lincoln and Mercury brand U.S. retail installment sale and lease portfolio, which was approximately 60% of our worldwide-managed portfolio of retail installment receivables and net investment in operating leases at December 31, 2004.
On-Balance Sheet. Charge-offs, excluding charge-offs related to reacquired receivables, declined $236 million in 2004 compared with a year ago, reflecting our emphasis on purchasing higher quality receivables and enhancements to our collection practices. These actions, along with improved economic conditions in the U.S., have contributed to fewer repossessions in 2004. In addition, higher used vehicle prices have reduced the average loss per repossession.
Managed. Charge-offs declined $528 million compared with a year ago primarily reflecting fewer repossessions and a lower average loss per repossession, and lower levels of managed receivables resulting from lower retail installment and operating lease contract placement volumes over the past several years.
Other Metrics Serviced. Repossessions are shown in aggregate and as a percent of the average number of accounts outstanding during the relevant periods, defined as the repossession ratio. In 2004, our total number of repossessions was 165,000, down 35,000 from a year ago reflecting our emphasis on purchasing higher quality receivables and enhancements to our collection practices. The decrease in repossessions favorably affected our repossession ratio, which declined 25 basis points to 3.02% in 2004 from 3.27% in 2003. Our average loss per repossession was $6,600, down $750 per unit from a year ago primarily reflecting higher used vehicle prices.
In 2004, the over-60-day delinquency ratio was 0.18%, down from 0.35% a year ago. Full year delinquency ratios reflect an average of the quarterly ratios, which express delinquencies as a percent of the end-of-period accounts outstanding for non-bankrupt accounts.
Our allowance for credit losses and our allowance for credit losses as a percentage of end-of-period net receivables, for our on-balance sheet portfolio, are shown below:
The decrease in the allowance for credit losses of approximately $500 million primarily reflected significantly improved charge-off performance in the United States, specifically fewer repossessions and a lower average loss per repossession in the Ford, Lincoln and Mercury brand U.S. retail installment sale and operating lease portfolio. Our emphasis on purchasing higher quality receivables, enhancements to our collection practices and higher used vehicle prices resulted in a reduction in net charge-offs and the associated provision for credit losses.
A description of our process for setting this allowance is provided below in Critical Accounting Estimates Allowance for Credit Losses. Our allowance for credit losses does not include any allowance for receivables that we have sold in off-balance sheet securitizations and whole-loan sale transactions.
We are exposed to residual risk on operating leases, Red Carpet Option contracts and similar balloon payment products where the customer has the right to return the financed vehicle to us. Our residual risk on operating leases and other contracts is composed of two types of risk: residual value risk and return rate risk. Residual value risk is the risk that the amount we obtain from returned vehicles sold at auction will be less than our estimate of the expected residual value for the vehicle. Return rate risk is the possibility that the percentage of vehicles returned to us at contract termination will be higher than we expect. Residual risk on operating leases is discussed in more detail below in Critical Accounting Estimates Accumulated Depreciation on Vehicles Subject to Operating Leases.
We use various statistics to monitor our residual value risk and return rate risk. Placement volume measures the number of leases we purchase each year. Termination volume measures the number of vehicles for which the lease has ended in each year. Return rates reflect the percentage of vehicles that are returned to us at the end of the terminated lease. The following table shows placement volumes, termination volumes and return rates for our North America segment, which accounted for 93% of our total net investment in operating leases at December 31, 2004:
In 2004, North America placement volumes were up 69,000 units compared with a year ago. Termination volumes were down 196,000 units compared with a year ago, largely related to lower contract placement volumes in 2001 and 2002. In 2004, return rates were down 8 percentage points compared with a year ago, primarily reflecting higher used vehicle prices and lower contract residual values.
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:
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 particular securities we issue, based on information provided by Ford, other sources, and us. 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. Our credit ratings from all of the NRSROs are closely associated with their opinions on Ford. Our lower ratings over the past several years are primarily a reflection of those opinions, including concerns regarding Fords automotive cash flow and profitability, declining market share, excess industry capacity, industry pricing pressure and rising healthcare costs.
The ratings and trend assigned to us by DBRS have been in effect since April 2003 and were confirmed by DBRS in October 2004. Fitch revised our rating outlook to Stable from Negative in May 2004 and the outlook was affirmed in October 2004. The ratings assigned by Fitch have been in effect since January 2002 and were affirmed by Fitch in October 2004. The ratings and outlook assigned by Moodys have been in effect since January 2002 and were affirmed by Moodys in October 2004. The ratings and outlook assigned by S&P have been in effect since November 2003 and were affirmed by S&P in October 2004. The following chart summarizes our credit ratings and the outlook assigned by the NRSROs since 2002:
Our funding sources include debt issuances, sales of receivables in securitizations and other structured financings, and bank borrowings. Debt issuance consists of short- and long-term unsecured debt, placed directly by us or through securities dealers or underwriters in the United States and international capital markets, and reaches both retail and institutional investors. We issue commercial paper in the United States, Europe, Canada and other international markets, with sales mostly to qualified institutional investors. Rule 2a-7 under the Investment Company Act of 1940, as amended, limits money market mutual funds subject to that Act to investments only in securities that have received a 1 or 2 rating from at least two NRSROs. In particular, money market mutual funds may hold no more than 5% of their assets in the Tier-1 securities of any issuer and no more than 1% of their assets in the Tier-2 securities of any issuer (with no more than 5% of assets permitted in Tier-2 securities from all issuers combined). Tier-1 securities are those receiving a 1 rating from at least two NRSROs; Tier-2 securities are those receiving a 2 rating from at least two NRSROs and not a 1 rating from at least two NRSROs.
In 2001 and 2002, S&P, Moodys and Fitch lowered our short-term ratings from their respective 1 rating category (A-1/P-1/F1) to their 2 rating category (A-2/P -2/F2), while DBRS maintained our short-term rating (R-1 (low)) in their 1 rating category. In 2003, S&P further lowered our short-term rating to A-3. Consequently, since October 2001 we have been a Tier-2 commercial paper issuer and remain so at present. The U.S. market for Tier-2 commercial paper (i.e., that having the second highest rating from at least two NRSROs) is only approximately 5% the size of the U.S. Tier-1 commercial paper market ($57 billion outstanding for Tier-2 compared with $1.3 trillion
outstanding for Tier-1 at December 31, 2004). The U.S. Tier-2 market increased from $54 billion outstanding at the end of 2003 to $57 billion outstanding at the end of 2004.
We also obtain short-term funding from the sale of floating rate demand notes, which may be redeemed at any time at the option of the holder thereof without restriction. At December 31, 2004, the principal amount outstanding of such notes was $7.7 billion. We do not hold reserves to fund the payment of the demand notes or any other short-term funding obligation. Our policy is to have sufficient cash and cash equivalents, unused committed bank-sponsored asset-backed commercial paper issuer (conduit) capacity, securitizable assets, and back-up credit facilities to provide liquidity for all of our short-term funding obligations. FCE also issues certificates of deposit primarily to institutional investors in various markets to obtain short-term funding. Bank borrowings by several of our international affiliates in the ordinary course of business are an additional source of short-term funding.
We issue a variety of long-term debt securities in the United States and international capital markets to both retail and institutional investors. Long-term debt is debt with an original maturity of more than 12 months. We use several long-term funding programs, including notes offered with a variety of maturities of two years and longer, and medium-term notes sold through sales agents in smaller amounts in various currencies.
As part of maintaining a diverse global funding strategy, we also issue long-term debt securities to retail investors. We access retail investors in the United States through our Continuously Offered Bonds for Retail Accounts program, in Canada through our Term Bonds in Retail Distribution program, and in select European markets through our Continuously Available Retail Securities program (formerly known as Internotes). We issue debt to retail investors at various maturities ranging from eighteen months to 30 years. Total outstanding balances in our long-term retail programs were $9.1 billion at year-end 2004 (United States $6.2 billion, Canada $1.9 billion, FCE $1.0 billion), up $3.0 billion compared with year-end 2003.
We also transfer receivables and interests in operating leases and the related vehicles in securitizations and other structured financings to obtain funding. These transfers are considered sales for legal purposes. We securitize receivables and interests in operating leases and the related vehicles because of the lower cost compared with unsecured funding at our present credit ratings. These transactions can be structured to provide both short- and long-term funding. For a more complete discussion of securitization and other structured financings, see Sales of Receivables Transactions below.
Our funding strategy is to maintain liquidity and access to diverse funding sources that are cost effective. During 2004, we continued to meet a significant portion of our funding requirements through securitizations because of the stability of the market for asset-backed securities, their lower relative costs and the diversity of funding sources that they provide.
As a result of lower credit ratings over the last three years, we focused our efforts on further diversification of funding sources and reduced our reliance on short-term funding, especially unsecured commercial paper. We launched new asset-backed commercial paper and retail unsecured bond programs, and expanded our securitization and other structured financing channels, including transactions by foreign affiliates and expansion of our conduit program. As our short-term credit ratings have declined, asset-backed commercial paper programs have become more cost-effective compared with unsecured commercial paper, and allow us access to a larger investor base as discussed in Funding Sources above.
As a result of our funding strategy and the reduction in our managed receivables, lower credit ratings during the past three years have not had a material impact on our ability to fund our operations. Any further lowering of our credit ratings may increase our borrowing costs and potentially constrain our funding sources. This could cause us to increase our use of securitization or other sources of liquidity or to reduce the amount of receivables we could purchase, thereby potentially adversely affecting our ability to support the sale of Ford brand vehicles.
The cost of both debt and funding in securitizations is based on a margin or spread over a benchmark interest rate. Spreads are typically measured in basis points. Our unsecured commercial paper and floating rate demand notes funding costs are based on spreads over the London Interbank Offered Rate (LIBOR), a commonly used benchmark interest rate. Our unsecured long-term debt and securitized funding costs are based on spreads over United States Treasury securities (U.S. Treasury) of similar maturities, LIBOR or other benchmark rates.
In addition to enhancing our liquidity, one of the main reasons that we have used securitizations as a funding source over the last few years has been that spreads on our securitized funding have been more stable and lower than those on our unsecured term-debt funding. Our unsecured spreads have been very volatile over the last three years, as a result of market perceptions and our lower credit ratings, whereas our securitized funding spreads (which are based on the underlying finance receivables and credit enhancements) have not. Over the last two years, our unsecured long-term debt funding spreads have fluctuated between 124 and 638 basis points above comparable U.S. Treasury securities, while our spreads on securitized funding have fluctuated between 35 and 63 basis points above comparable U.S. Treasury securities. The following chart shows our spreads at the end of each quarter, and the average, high and low spreads in 2004, and at each year-end in the 2002 through 2003 periods:
Our outstanding debt and securitized off-balance sheet funding was as follows on the dates indicated:
At December 31, 2004, unsecured commercial paper was up $2.8 billion compared with year-end 2003, reflecting increased investor demand. At December 31, 2004, total debt plus securitized off-balance sheet funding was down $13.3 billion compared with year-end 2003, primarily reflecting repayment of debt maturing in 2004 and lower funding requirements due to lower asset levels.
Short-term debt and notes payable within one year as a percentage of total debt increased from 36% at year-end 2003 to 43% at year-end 2004, primarily resulting from higher commercial paper balances (unsecured and asset-backed). The ratio of total credit lines to total unsecured commercial paper (including Ford bank lines) has been more than 100% at each year-end in the 2002 through 2004 period, primarily due to a reduction in our unsecured commercial paper balance.
During 2004, we issued $18.4 billion of long-term debt with maturities of one to 30 years, including $9.9 billion of unsecured institutional funding, $4.7 billion of unsecured retail bonds, $3.6 billion of on-balance sheet securitizations, and approximately $200 million of other long-term debt. In addition, we realized proceeds of $10.3 billion from sales of receivables in off-balance sheet securitizations.
The following table shows our term public funding issuances for 2003 and 2004 and our planned issuances for 2005:
We expect our full-year 2005 term public funding requirements to be between $20 billion and $30 billion. In 2004, we completed about $18 billion of public term funding transactions. Because of significant available liquidity and our relatively smaller balance sheet size, in 2004 we purchased in open market transactions a small portion of our outstanding debt securities. Depending on market conditions, we may continue repurchasing a portion of our outstanding debt securities during 2005.
Because we expect to continue using private funding sources and further reduce our managed receivables in 2005, our term public funding requirements are lower than the combined amount of maturing debt and amortization of asset-backed securities (about $54 billion). Any whole-loan sale transactions (see Liquidity below) could further reduce our funding requirements. We can offer no assurance that we will not change our funding plan, and our funding plan and ability to meet our funding plan are subject to risks and uncertainties, many of which are beyond our control (see Liquidity Risks below).
Maintaining liquidity through access to diverse funding sources has always been a key factor in our funding strategy. We define liquidity as our ability to meet our funding needs, which includes purchasing retail installment sale and lease contracts, funding other financing programs and repaying our debt obligations as they become due, or earlier under certain debt retirement programs. Our policy is to have sufficient cash and cash equivalents, unused conduit capacity, securitizable assets and back-up credit facilities to provide liquidity for all of our short-term funding obligations. In addition to unsecured debt offerings (discussed above) and sales of receivables (discussed below), we have access to the following other sources of liquidity:
Cash and Cash Equivalents. At December 31, 2004, our cash and cash equivalents totaled $12.7 billion, compared with $15.7 billion at year end 2003, down $3.0 billion, primarily reflecting debt maturities in excess of new debt issuances. In the normal course of our funding transactions, we may generate more proceeds than are necessary for our immediate funding needs. These excess amounts are maintained primarily as highly liquid investments, which provide liquidity for our short-term funding obligations and give us flexibility in the use of our other funding programs. Our cash and cash equivalents include short-term U.S. Treasury bills, federal agency discount notes, A-1/P-1 (or higher) rated commercial paper, and bank time deposits with investment grade institutions. The average term of these investments is typically less than 60 days. We monitor our cash levels daily and adjust them as necessary to support our short-term liquidity needs.
Conduit Program. We have entered into agreements with a number of conduits under which such conduits are contractually committed to purchase from us, at our option, up to $14.3 billion of receivables in the aggregate as of December 31, 2004. This is an extremely liquid funding source, as we are able to access funds in two days. These agreements have varying maturity dates between June 23, 2005 and October 13, 2005 and, in the past, have been renewed on an annual basis. As of December 31, 2004, we had utilized approximately $4.6 billion of these conduit commitments. These agreements do not contain restrictive financial covenants (for example, debt-to-equity limitations or minimum net worth requirements) or material adverse change clauses that would relieve the conduit of its obligation to purchase receivables. However, they do contain provisions that could terminate the unused portion of the purchase commitments if the performance of the sold receivables deteriorates beyond specified levels. Based on our experience, we do not expect any commitments to be terminated due to these performance requirements. None of these arrangements may be terminated based on a change in our credit rating.
Whole-Loan Sale Transactions. During 2002, we began a program to sell retail installment sale contracts in transactions where we retain no interest and thus no exposure to the sold assets. These transactions, which we refer to as whole-loan sale transactions, provide liquidity by enabling us to reduce our managed receivables and our need for funding to support those receivables. Total outstanding receivables sold in whole-loan transactions at December 31, 2004 were $4.0 billion.
Our back-up credit facilities were as follows on the dates indicated:
For additional funding and to maintain liquidity, we and our majority-owned subsidiaries, including FCE, have contractually committed credit facilities with financial institutions that totaled approximately $7.5 billion at December 31, 2004. This includes $4.3 billion of Ford Credit facilities ($3.9 billion global and approximately $400 million non-global) and $3.2 billion of FCE facilities ($3.0 billion global and approximately $200 million non-global). Approximately $800 million of the total facilities were in use at December 31, 2004. These facilities have various maturity dates. Of the $7.5 billion, about 39% of these facilities are committed through June 30, 2009. Our global credit facilities may be used at our option by any of our direct or indirect, majority-owned subsidiaries. FCEs global credit facilities may be used at its option by any of its direct or indirect, majority-owned subsidiaries. We or FCE, as the case may be, will guarantee any such borrowings. All of the global credit facilities have substantially identical contract terms (other than commitment amounts) and are free of material adverse change clauses and restrictive financial covenants (for example, debt-to-equity limitations, minimum net worth requirements and credit rating triggers) that would limit our ability to borrow.
At Fords option, approximately $6.9 billion of Fords global lines of credit may be used by any of its direct or indirect, majority-owned subsidiaries on a guaranteed basis. Ford also has the ability to transfer, on a non-guaranteed basis, $2.6 billion of such credit lines to us and $518 million to FCE.
Additionally, at December 31, 2004, banks provided $18.0 billion of contractually committed liquidity facilities supporting two asset-backed commercial paper programs; $17.5 billion supported our FCAR program and $500 million supported our Motown NotesSM program. Unlike our other credit facilities described above, these facilities provide liquidity exclusively to each individual asset-backed commercial paper program. Utilization of these facilities is subject to conditions specific to each program. At December 31, 2004, about $15.7 billion of FCARs bank credit facilities were available to support FCARs asset-backed commercial paper or subordinated debt. The remaining $1.8 billion of available credit lines could be accessed for additional funding if FCAR issued additional subordinated debt. For a more complete discussion of FCAR, see Sales of Receivables Transactions On-Balance Sheet Arrangements below.
Despite our diverse sources of liquidity, our ability to maintain our liquidity may be affected by the following factors:
We periodically sell receivables in securitizations and other structured financings and in whole-loan sale transactions. Some of these arrangements satisfy accounting sale treatment consistent with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140) and are not reflected on our balance sheet in the same way as debt funding, but could have an effect on our financial condition, operating results and liquidity. Some of these arrangements do not satisfy the requirements for accounting sale treatment and the sold receivables and associated debt are not removed from our balance sheet.
The securitization process involves the sale of securities to investors, the payment of which is secured by a pool of receivables. The cash flows on the underlying receivables are used to pay principal and interest on the debt securities as well as transaction expenses. Because of the similarity between securitizations and structured financings, we include structured financings and refer to them as securitizations in our analysis of off-balance sheet arrangements and elsewhere in this report.
We have participated in the securitization market since 1988. Automobile finance receivables are one of the largest classes of assets that are securitized and we are regularly one of the largest
securitizers of automobile finance receivables. We securitize our receivables because the highly liquid and efficient market for securitization of financial assets provides us with a lower cost source of funding, compared with unsecured debt given our present credit ratings, diversifies our funding among different markets and investors, and provides additional liquidity.
Our securitization programs are diversified among asset classes and markets. We securitize retail installment sale contracts, wholesale receivables, and interests in operating leases and the related vehicles. We participate in securitization markets in North America, Europe, and Asia-Pacific, using assets originated in the United States, Canada, the United Kingdom, Germany, Spain, Italy, France, Japan, Australia and Mexico.
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 secured 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 has limited purposes and may only be used to purchase the receivables, issue asset-backed securities and make payments on the securities. The SPE has a limited duration and generally terminates when investors holding the asset-backed securities have been paid all amounts owed to them. Our use of SPEs in our 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 our creditors. If accounting rules are met, the sold receivables and associated debt are removed from our balance sheet. 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 our own 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.
We sponsor the SPEs used in all of our securitization programs with the exception of bank-sponsored asset-backed commercial paper issuers. None of our officers, directors or employees holds any equity interests in our SPEs or receives any direct or indirect compensation from the SPEs. These SPEs do not own our stock or stock of any of our affiliates.
Our typical U.S. retail securitization is a two-step transaction. We sell a pool of our 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 or certificates 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 flow chart diagrams our typical U.S. retail securitization transaction:
We select receivables at random for our 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. In our retail transactions, we typically exclude receivables where the obligor is having a credit problem that is evidenced by more than 30-day delinquency, bankruptcy or payment extensions.
We provide various forms of credit enhancements and payment enhancements to reduce the risk of loss for senior classes of securities and enhance the likelihood of timely payment of interest and principal when due. These enhancements include over-collateralization (when the principal balance of receivables owned by the SPE exceeds the principal amount of asset-backed securities issued by the SPE), segregated cash reserve funds, subordinated securities, and interest rate swaps.
We retain interests in receivables sold through securitizations. The retained interests may include senior and subordinated securities issued by the SPE, undivided interests in wholesale receivables, restricted cash held for the benefit of the SPE (for example, a reserve fund) and residual interests in securitization transactions. Income from residual interest 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. Retained interests, including a portion of our undivided interest in wholesale receivables, are subordinated and serve as credit enhancements for the more senior securities issued by the SPE to help ensure that adequate funds will be available to pay investors that hold senior securities. Our ability to realize the carrying amount of our retained interests depends on actual credit losses and prepayment speeds on the sold receivables. We retain credit risk in securitizations. Our retained interests include the most subordinated interests in the SPE, which are the first to absorb credit losses on the sold receivables. The impact of credit losses in the pool of sold receivables will likely be limited to our retained interests because securitizations are structured to protect the holders of the senior asset-backed securities.
The SPE engages us as servicer to collect and service the sold receivables for a servicing fee. Our servicing duties include collecting payments on receivables, and preparing monthly investor reports on the performance of the sold receivables that are used by the trustee to distribute monthly interest and/or principal payments to investors. While servicing the sold receivables for the SPE we apply the same servicing policies and procedures that we apply to our owned receivables and maintain our normal relationship with our financing customers.
We sell retail and wholesale receivables through a variety of off-balance sheet securitization programs, using both amortizing and revolving structures. These programs are targeted to many different investors in both public and private markets worldwide:
In the U.S., we generally are able to access the securitization markets in two days, in the case of our unutilized capacity in conduits and our Motown NotesSM program, and generally two to three weeks for repeat transactions in our retail and wholesale securitization programs. New programs and new transaction structures typically require substantial development time before coming to market.
We generally have no obligation to repurchase or replace any receivable sold to an SPE that subsequently becomes delinquent in payment or otherwise is in default. Investors holding securities issued by an SPE have no recourse to us or our other assets for credit losses on the sold receivables and have no right to require us to repurchase the securities. We do not guarantee any asset-backed securities and have no obligation to provide liquidity or make monetary contributions or contributions of additional receivables to our SPEs either due to the performance of the sold receivables or the credit rating of our short-term or long-term debt. However, as the seller and servicer of the finance receivables to the SPE, we are obligated to provide certain kinds of support to our securitizations, which are customary in the securitization industry. These obligations consist of indemnifications, receivable repurchase obligations on receivables that do not meet eligibility criteria or that have been materially modified, the mandatory sale of additional receivables in revolving transactions, and servicer advances. See Note 7 of our Notes to the Financial Statements for more information about these repurchases.
Risks to Continued Funding under Securitization Programs
Some of our securitization programs contain structural features that could prevent us from using these sources of funding if:
Based on our experience, we do not expect that any of these features will have a material adverse impact on our ability to use securitization to fund our operations.
In addition to the specific transaction-related structural features discussed above, our ability to sell receivables in securitizations may be affected by the following factors:
If as a result of any of these or other factors the cost of securitized funding were to increase significantly or funding through securitizations were no longer available to us, it would have a material adverse impact on our operations, financial condition and liquidity. However, given the diversity of our securitization programs, it is not likely that these risk factors would impact all programs simultaneously. In addition, new structures could be developed, recognizing that substantial time is required for the development, launch, and market acceptance of new programs.
Some of our securitization programs do not satisfy accounting sale treatment and are, therefore, included in our financial statements. These programs have many of the structural features, continuing obligations, and risks as the off-balance sheet arrangements described above. Assets that have been set aside to repay debt issued by securitization SPEs are only available to repay the debt issued by the securitization SPEs and to pay other securitization investors and other participants. These assets are not available to pay our other obligations or the claims of our other creditors. The debt issued by these securitization SPEs is payable out of collections on these assets. This debt is the legal obligation of the securitization SPEs and is not the legal obligation of Ford Credit or its other subsidiaries.
FCAR. We use a special purpose on-balance sheet trust, FCAR, as a source of funds for our operations. FCARs activities are limited to issuing asset-backed commercial paper and other securities, borrowing from banks and buying highly-rated asset-backed securities issued by securitization SPEs sponsored by us. As of December 31, 2004, FCAR held only asset-backed securities secured by retail installment sale contracts.
We could be prevented from using FCAR as a source of funding in certain circumstances. If credit losses or delinquencies in our portfolio of retail, wholesale or lease receivables exceed specified levels, FCAR is not permitted to purchase additional asset-backed securities of the affected type for so long as such levels are exceeded. FCAR is permitted to purchase only highly rated asset-backed securities, and if the credit enhancement on any asset-backed security purchased by FCAR is reduced to zero, FCAR may not purchase any additional asset-backed securities and would wind down its operations.
Other Securitizations. Securitization SPEs we sponsor have also issued notes backed by interests in operating leases and the related vehicles held in titling SPEs in the United States, by wholesale receivables originated in Spain and France and by retail installment sale contracts originated in Australia.
We sell pools of retail installment sale contracts in whole-loan sale transactions. Unlike our securitizations, in whole-loan sale transactions we do not retain any interests in the sold receivables and do not have any risk of loss related to the sold receivables. We continue to service the receivables sold in whole-loan sale transactions.
Off-Balance Sheet Sales of Receivables Activity
The following table illustrates our worldwide receivable sales activity in off-balance sheet securitizations and whole-loan sale transactions for the periods indicated:
At December 31, 2004, off-balance sheet receivables outstanding totaled $39.6 billion, down $14.6 billion compared with a year ago. In 2004, the amount of receivables sold in off-balance sheet transactions was $6.9 billion, down about $12.4 billion from 2003.
Our worldwide proceeds from the sale of retail and wholesale finance receivables through off-balance sheet securitizations and whole-loan sale transactions are shown below for the periods indicated: