1 Credit University
Jan 19, 2015
1
Credit University
2
Agenda
• Overview• Mission & Vision
• What Back to Basics Means for Us
• Finance Company Business Practices• Origination: Buy it Right
• Service: Operate Efficiently & Collect Effectively
• Funding: Fund it Efficiently; Manage Risks
• Results• Customer Loyalty
• Profits
• Conclusion
3
Automotive Industry
Financial Services
Ford Credit Is A Business Where the Automotive Industry and the Financial Services Industry Meet
4
Ford Credit’s Mission and Vision
Be recognized as the world leader in providing automotive financial services, achieving superior profitability through:
•Driving synergies with our automotive partners;
•Maximizing customer, dealer, and employee satisfaction;
•Optimizing operating efficiencies and achieving high performance through resourcefulness, flawless execution, and teamwork;
•Leveraging brands and customer relationships with a focused range of superior products and services.
Vision
To support Ford Motor Company vehicle sales worldwide, and to provide increasing shareholder value.
Mission
5
What Does Ford Credit Add to Total Ford Motor Enterprise Value?
• Creates Synergies that Drive Incremental Retail Vehicle Sales and Financing Profits
• Establishes Frequent Ford Customer Touch Points
• Supports Ford’s Dealer Body
• Supports Ford in Growing Markets
• Provides a Stable Profit Stream Partially Offsetting Automotive Cycles
6
What Back to Basics Means to Us
• Buy it right
– Including pricing and risk
• Collect it effectively
• Operate efficiently
• Provide outstanding service to our customers
– Including consumers, dealers, fleets and our automotive partners
7
Agenda
• Overview• Mission & Vision
• What Back to Basics Means for Us
• Finance Company Business Practices• Origination: Buy it Right
• Service: Operate Efficiently & Collect Effectively
• Funding: Fund it Efficiently; Manage Risks
• Results• Customer Loyalty
• Profits
• Conclusion
8
Originate
•Buy it Right
Service
•Operate Efficiently
•Collect it Effectively
Finance Company Basic Business Process
Fund
•Fund it Efficiently
•Manage Risks
9
Buy It Right
• Sourcing: Strong Relationships with Dealers andSupport for Automotive Brands
• Robust Underwriting Process
– Credit Evaluation -- Proprietary Scoring Models
– Verification
Result: Strong Volume, Share and Margins
•Buy it Right
Service
•Operate Efficiently
•Collect it Effectively
Fund
•Fund it Efficiently
•Manage Risks
Originate
10
Elements of Strong Dealer Relationships
• Long-term presence in marketplace; consistent finance purchase policy
• Broad array of products and services; dealer training and consulting available
• Automated in-dealership contract origination system – networked to financial institution
• Manufacturer-supported marketing incentive programs
10-K Report – Page 2
11
• Long-term presence in marketplace; consistent finance purchase policy
• Broad array of products and services; dealer training and consulting available
• Automated in-dealership contract origination system – networked to financial institution
• Manufacturer-supported marketing incentive programs
Elements of Strong Dealer Relationships
10-K Report – Page 2
• More detail on this topic is available on Page 2 of Ford Credit’s 2001 10-K Report
• Additional material in this presentation is also cross-referenced with the2001 10-K Report
12
Several Brands Supporting a Variety of Products
• Retail Installment Contracts
• Lease
• Wholesale
• Commercial Products
• Money Market
• Insurance
10-K Report – Page 2
13
Underwriting Process
Goal• Separate / differentiate creditworthy applicants from
non-creditworthy applicants
Proprietary Scoring Models• Developed from database of 23 million contracts
(accepted & rejected contracts)• Use credit bureau data, contract, and applicant
characteristics to rank-order probability of repayment• Pricing segmented into 6 tiers for each contract term
and product type• Quarterly validation and comparison to external sources
Verification• Verify information supplied by consumer on credit
application (income, employment, etc.)
14
Credit Unions
17%
TotalFord Credit 20%
GMAC 14%
CFC 7%
Other Banks/ Finance Cos.
19%Banks/Finance
Cos. 27%
Toyota Financial Svcs. 5%
Other Captives 10%
B of A 2%
Bank One 2%
Wells Fargo 1%
Total New Retail Volume - $260 Billion
Total Captives 56%
U.S. New Vehicle Financing Industry
Chase 3%
Total Industry Banks/Finance Companies
10-K Report – Pages 16 & 17
15
U.S. New Wholesale Finance Industry
Total New Wholesale Receivables– $70 Billion
Total Ford Credit
27%(83.5% of Ford and L/M
Wholesale)Other
Finance Sources
43%
GMAC 20%
.(71.5% of GM Wholesale)
CFC 10%
(69% of Chrysler Wholesale)
10-K Report – Pages 16 & 17
16
Ford Credit Revenue Sources
• Majority of revenue is in the form of loan & lease payments received from customers
• Interest rate support is received from Ford Motor Company (also known as subvention) and reported as Automotive Variable Marketing Costs
Retail & Lease (Net of Lease
Depreciation)Wholesale Other
Payments from Customers
Support from Ford Motor
10-K Report – Page 9
17
Key Drivers of Volume and Revenue
• Contract Volume Placed – industry volume, Ford vehicle market share, Ford Credit market share
• Amount Financed – vehicle pricing, product mix, customer down-payment
• Contract Term – customer preferences
• Interest Rate – economic and market conditions, competition
• Support from Ford Motor Company
18
1998 Originations
1999 Originations
2000 Originations
2001 Originations
2002 Originations
2002 PortfolioPBT:
Is mostly comprised of business originated in prior years
Today’s Portfolio
19
Originate
Efficient Operations
• Low Cost – operating costs at about 1% of assets in North America
• Economies of scale from large volume
Fund
•Buy it Right
•Operate Efficiently
•Collect it Effectively
•Fund it Efficiently
•Manage Risks
Service
20
Global Operations
FORD CREDIT MARKETS
• Direct Operations in 36 Countries
• Worldwide Trade Financing in an additional 71 Countries
• Over 20,000 Employees
WORLDWIDE TRADE FINANCING MARKETS
10-K Report – Page 1
21
•8 Consolidated Centers Supporting 175 Sales & Marketing Branches
•Use the latest technology (auto-dialers, workflow imaging, etc.) to drive efficiency
•95% of loans electronically entered; 30-35% electronically approved
Centralized Servicing and Collections
10-K Report – Pages 5 & 19
22
Effective Collections
• Credit Losses are an expected part of the business
Fund
Originate
•Buy it Right
•Operate Efficiently
•Collect it Effectively
•Fund it Efficiently
•Manage Risks
Service
23
Drivers of Higher Credit Losses
U.S. Economy• Long period of economic expansion;
rapid growth during the transformation
• Weakening in Economic Environment Accelerated Post September 11
– Sharply Higher Unemployment Rates– Decline in Consumer Confidence– Continuing High Level of Bankruptcy
Factors Driving Higher Actual Losses • Frequency (Number of Contracts Charged-Off / Contracts Outstanding)
– Increases in Repossession and Delinquencies– Sharp Rises in Voluntary Surrenders
• Severity (Loss per Unit Charged-Off)
– Lower used car values– Increased Skips (No vehicle recovery)
10-K Report – Page 19
24
Sharp Rise in Unemployment Post 9/11 Was Unanticipated
U.S. Unemployment Rate
3.5
4.0
4.5
5.0
5.5
6.0
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan
1989 / 2000 1990 / 2001 1991 / 20022000 2001 2002
Dec. 20004%
Dec. 20015.8%
Feb. 20025.5%
5.6%
25
40
60
80
100
120
140
Jan Mar May Jul Sep Nov Jan5678910111213
National Consumer NewBankruptcy Filings (000)
FMCC U.S. NewBankruptcy Filings (000) a/
Bankruptcy Filing TrendsFor 2001, Ford Credit up 18%; National up 20%
a/ Includes PRIMUS & Fairlane; Volume adjusted
2001 2002
b/ Implemented new accelerated bankruptcy notification system in 2002
b/
26
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Worldwide Managed LTR
0.99%
1.46%Ford Credit U.S. Managed LTR
(Retail & Lease)
0.79%
1.76%
2000 & 2001 Credit LossesLoss to Receivables Ratio
2000 2001
10-K Report – Page 19
1.15%
1.02%
27
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Worldwide Managed LTR
1.51%
0.38%
1.20%Ford Credit U.S. Managed LTR
(Retail & Lease)1.32%
0.54%
1.31%
Ford Credit — Historical Credit Losses
Loss to Receivables Ratio – Full Year
10-K Report – Page 19
28
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan Feb
2000 - 2002 Repossession Ratios
Memo: Voluntary Surrenders as Pct. of Total Reposs.
2.83%
2.17%
Ford Credit U.S. Repossession Ratio
2000 2001
1.92%
2.40%
2.13%
35% 33% 26% 27% 29% 32% 34% 34% 35% 35%
3.02%
2.77%
2.84%
2.21%
2002
20012.37%
29
$4,500
$5,000
$5,500
$6,000
$6,500
$7,000
$7,500
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan Feb
$ p
er c
har
ge-
off
Severity TrendAverage $ Loss Per Unit
Ford Credit U.S. Portfolio
$7,211
$5,572
2000 2001
$6,960
$6,487$6,272
$6,107
2002
2001
$6,228 $6,579
30
Credit Loss Reduction Actions
• Refined purchase policy and discount rates (primarily used)
• Developing bankruptcy predictors and monitoring portfolio
• Increased collection capacity
• Improved collection segmentation and processes
• Improved accountability, linkage, and communication
10-K Report – Page 20
31
Ford Credit Works Throughout Leases
to Manage Residual ValuesAt Contract Origination
• Avoid major volume concentrations
• Manage lease term and vehicle-line mix
• Publish detailed residual values
Through Vehicle Life
• Ford Credit works jointly with Automotive through the vehicle life to improve residual values
At Lease Termination
• Optimize auction seasonality through flexible terms, extensions, and early termination programs
• Utilize vehicle remarketing efficiencies (ship vehicles to most desired auctions)
10-K Report – Page 21
32
Financial Reporting of Residuals10-K Report – Page 21
40%
45%
50%
55%
60%
65%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan Feb
% o
f M
SR
P
2000 2001 2002
$(1,600)
Auction Value
ContractLease-End Value
• Contract lease-end value for the customer is set based on market factors
• At lease inception, an internal forecast is developed for expected auction values based on a proprietary econometric model that includes new product plans and vehicle quality data
• The difference between contract lease-end value and expected auction value is adjusted through depreciation expense in a reserve that is included in accumulated depreciation on the balance sheet
• Residual values are monitored monthly; reserve adequacy is reviewed quarterly based on:
• Number of vehicles off-lease• Units to Auction (expected return
rates)
2000 2001 2002
33
$15,925
$13,025
$16,400
$17,575
$19,900
36 MONTH TERM
OCT. DEC. JAN. MAR. MAY JUL. SEP. NOV. JAN. MAR.2000 2001 2002
1998 Model Year 1999 Model Year
Durango
Grand Cherokee
Explorer
Blazer
Explorer Auction Performance
34
$8,650$9,200
$10,750 $10,250
$10,200
$11,475
36 MONTH TERM
OCT. DEC. JAN. MAR. MAY JUL. SEP. NOV. JAN. MAR.2000 2001 2002
1998 Model Year 1999 Model Year
Taurus Auction Performance
Taurus
Lumina
Camry
Cirrus
35
Efficient Funding
• Borrowing cost key drivers
• Credit Ratings
• Funding Sources and Strategy
• Manage Risk
Originate
•Buy it Right
Service
•Operate Efficiently
•Collect it Effectively
Fund
•Fund it Efficiently
•Manage Risks
36
Borrowing Cost Key DriversBorrowing Costs Operating
ExpensesCredit Losses
• Borrowing cost is our largest expense
• Borrowing cost is a finance company’s “raw material”
• The key factors that drive our borrowing cost are:
• Credit ratings
• Our funding strategy
• Market conditions and our credit spreads
PROFITS
37
Short and Long-Term Debt Credit Ratings
Credit Ratings are:• An assessment by the rating agencies of the credit risk of the securities
we issue• Each rating agency has criteria for evaluating company risk• Not recommendations to buy, sell or hold securities
10-K Report – Page 22
Ford Credit Short-Term Debt
Long-Term Debt Company Outlook
Fitch
Moody’s
S&P
Memo:
Ford Motor Company
Fitch
Moody’s
S&P
F-2
P-2
A-2
BBB+
A3
BBB+
BBB+
Baa1
BBB+
Negative
Negative
Negative
Negative
Negative
Negative
Most recent action: January 16, 2002
38
$12 $13
$111$135
$25
$46$42
$14
$135
$53
$6$14
2000 2001 Feb 2002
Funding Structure * ($ Billions)
$190
$208 $208
Commercial paper
as % of total 22% 7% 3%
Our Funding Strategy Focused on Liquidity10-K Report – Pages 23 & 24
Commercial Paper **
Securitization
Term-Debt & Other
Equity
Funding Strategy
• Ensure access to diversified funding sources
• Reduce reliance on short-term funding
• Increase usage of longer-term funding sources
• Increase securitization mix as it represents a lower funding cost alternative
• Optimize back-up facilities
Actions Taken
• Reduced commercial paper target to $5-7 billion
• Diversified funding through higher usage of term-debt
• Increased mix of securitization
• Added back-up liquidity funding sources
* Excludes FASB 133** Net of Overborrowing
39
1996 1997 1998 1999 2000 2001 Feb.
2002
Asset-Backed Securities40
81
Unsecured Debt
44
272
Three-year Credit Spreads: Ford Credit over Treasuries
10-K Report – Page 24
• Ratings on securities based on asset quality – not Ford Credit’s credit rating
In recent years, spreads on securitized funding have been more stable than unsecured term-debt
Securitization Has Become Lower Cost Funding Source
40
• An originator of financial receivables sells these to a trust
• The trust sells securities to investors to fund the purchase of the receivables
• For the originator’s GAAP statements, the financial receivables are considered to be sold and are subsequently reported as “off-balance sheet”
• Originates receivables
• Continues to service the receivables
• Owns receivables
• Sells highly rated securities
• Receive a return on investment
Ford Financial
Trust A/L
Investors
Receivables
Securities
$ Proceeds
$ Proceeds
Receivables
Securities
10-K Report – Page 27
In Securitization, We Sell Securities To Investors Backed By Financial Assets
41NOT RECENTLY USED
DIRECT TOTHE MARKET
BANK-SPONSORED
CONDUITS
DISTRIBUTION CHANNELS FOR ALTERNATIVE FUNDING
PROVEN CAPABILITY
ASSET CLASSES
ASSET-BACKED
COMMERCIAL PAPER(FCAR)
FORDFINANCIAL
RETAILASSETS
WHOLESALEASSETS
LEASEASSETS
10-K Report – Page 28
In Securitization, We Have Multiple Asset Classes And Distribution Channels
42
Accounting Standards Require Ford Credit to Recognize a Gain or Loss on Sale at the Time of Securitization
• Securitization pulls the asset gain or loss to the time of sale
• Profit impact will be neutral over time
• Gain/loss magnitude in the calendar year will vary depending on timing of transaction
Year 1 Year 2 Year 3
= Earnings
A January retail ABS pulls forward 24 months of earnings: 12 months’
earnings from year 1 and 12 months’ from year 2
A December retail ABS pulls forward 24 months of
earnings: 1 month’s earnings from year 1, 12 months’
earnings from year 2 and 11 months’ from year 3
This Recognition Recalendarizes Expected Profits:
10-K Report – Pages 31-32
43
10-K Report – Page 27
Securitization Requires The Use Of A Special Purpose Entity (SPE)
Ford Financial
Trust A/L
Investors
Receivables Securities
$ Proceeds
$ Proceeds
Receivables
Securities
• SPE is typically a bankruptcy- remote trust
• Transferred receivables are beyond reach of transferor
• The transferee is a “qualifying” SPE (QSPE) or an SPE with minimum 3% outside equity
• The transferor must surrender all control over the transferred receivables
• We use SPEs consistent with conventional industry practices to achieve off-balance sheet status
• We had 50 SPEs at February 28, 2002, including 14 sponsored by banks
• None of our officers, directors or employees holds any equity interests in our SPEs
Transferor
Transferee
44
Owned Securitized
Total Managed
Finance Receivables
Retail Installment
$83.4 $41.2 $124.6
Wholesale 15.4 17.4 32.8
Other 10.9 - 10.9
Subtotal $109.7 $58.6 $168.3
Net Investment in Operating Leases 39.3 0.2 39.5
Total $149.0 $58.8 $207.8
Managed Receivables Include Owned And Sold Receivables
Receivables as of Dec. 31, 2001 (Bils.)
10-K Report – Page 17
45
Bank-sponsored asset-backed commercialpaperAsset-backedcommercial paper
Ford Credit
Ford Credit Europe
Bank lines shared withFord
$33.4 *
$40.3 *
8.1 8.0
4.5 * 4.3 *
19.4 *
8.7 *
6.8
Year-End2000
Year-End2001
12.5
Back-up Facilities
• Enhance liquidity by protecting refinancing risk
• Market requirement to support commercial paper balances
2001 Implemented Enhancements:
• Increased back-up capacity by expanding distribution channels: Asset-backed commercial
paper Bank-sponsored asset-
backed commercial paper issuers
We Have Increased Our Back-up Credit Facilities To Enhance Liquidity
* Net of used
10-K Report – Page 24
46
We Monitor Leverage and Adjust Our Capital Structure Over Time
8
9
10
11
12
13
14
15
16
1999 2000 2001* 2002 Feb.
Implemented actions to hold leverage at our targeted level of 14:1• Eliminated planned 4th quarter 2001 and 1st quarter 2002 dividends to Ford• Ford made a capital contribution of $700 million on January 11, 2002• Continue to monitor leverage
Owned Managed
Total Debt
+ Gross Sold
Receivables
- Retained
Interest
- Other *
Adjusted Debt
Equity
+ SFAS-133
Adjusted Equity
Leverage (to 1)
(Bils.)
$146.3
-
-
(5.0)
$141.3
$12.0
0.6
$12.6
11.2
(Bils.)
$146.3
58.7
(12.5)
(5.0)
$187.5
$12.0
0.6
$12.6
14.8
Year-End 2001
14.8
13.6
11.2
14.0
12.0
13.6
12.2
9.7
* SFAS 133, overborrowing portfolio and cash
10-K Report – Page 26
Debt-to-Equity Ratio
Managed
Owned
47
Agenda
• Overview• Mission & Vision
• What Back to Basics Means for Us
• Finance Company Business Practices• Origination: Buy it Right
• Service: Operate Efficiently & Collect Effectively
• Funding: Fund it Efficiently; Manage Risks
• Results• Customer Loyalty
• Profits
• Conclusion
48
Effective Financing Execution Results in Higher Customer Loyalty
Customer Loyalty
Higher Customer Loyalty
Originate
• Buy it Right
Service
• Operate Efficiently• Collect it Effectively
Fund
• Fund it Efficiently• Manage Risks
49
Customer Loyalty to Ford
Loans
49%57%
45%
0%
25%
50%
75%
100%
FordCredit
Dealer-ArrangedBank Customers
CreditUnions
Leases
85%
66%
0%
25%
50%
75%
100%
FordCredit
Dealer-ArrangedBank Customers
Customer Loyalty
Source: Ford New Vehicle Customer Survey
50
Borrowing Costs Operating Expenses
Credit Losses
PROFITS
Dividends to Ford
Our Profits Contribute Directly to Ford
• Ford Credit is a wholly-owned subsidiary of Ford Motor Company
• A portion of Ford Credit’s profits are paid as a dividend to Ford; the reminder is retained at Ford Credit to manage leverage
10-K Report – Page 9
51
Ford Credit is a Large and Important Contributor to Company Profits
$0.8
$1.5
$1.3
$1.1$1.0
$0.4*
1997 1998 1999 2000 2001
$1.2
Ford Credit Net Income ($-Bil.) Ford Credit Share of Total Ford Net Income
Ford Credit $5.8 Bil.
32%
Automotive Sector $10.6 Bil.
58%
Total 1997-2001 Company Net Income $18.3 Bil. *
Total 1997-2001 Net Income ($-Bils.)
* Excludes gain on spin-off of The Associates
Hertz & Other
$1.9
10%
* One time adjustment in 2001 of $(361) mil. for SFAS 133 and unusual charges
Dividends to Ford $ 0.6 $ 0.5 $ 2.3 $ 0.1 $ 0.4
10-K Report – Page 9
52
Agenda
• Overview• Mission & Vision
• What Back to Basics Means for Us
• Finance Company Business Practices• Origination: Buy it Right
• Service: Operate Efficiently & Collect Effectively
• Funding: Fund it Efficiently; Manage Risks
• Results• Customer Loyalty
• Profits
• Conclusion
53
Modify Vision & Mission Moderate Asset Growth
From
Global Auto Finance Superpower
Industry-leading Growth
Broad Range of Products and Services
From
Global Auto Finance Superpower
Industry-leading Growth
Broad Range of Products and Services
Focus on Automotive Synergies
and Efficient Use of Capital
Re-focus Strategic Direction
To
Focus on AutoFinancing to Ford Brands
Superior Profitability
Focused Range Of Products and Services $113
$245
$208
1995 2001 2006
PriorPlan
PresentPlan
Managed Receivables (Bils.)
54
Summary
• We are focusing on the basics of our business:
– Buy it right – including pricing and risk
– Operate efficiently
– Collect it effectively
– Provide outstanding service to our customers, driving higher owner loyalty
• We will continue to be a competitive advantage for Ford and our dealers
55
Credit University