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EX-23 - EXHIBIT 23 - FORD MOTOR CREDIT CO LLCa6623968ex23.htm
EX-12 - EXHIBIT 12 - FORD MOTOR CREDIT CO LLCa6623968ex12.htm
EX-24 - EXHIBIT 24 - FORD MOTOR CREDIT CO LLCa6623968ex24.htm
EX-32.2 - EXHIBIT 32.2 - FORD MOTOR CREDIT CO LLCa6623968ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - FORD MOTOR CREDIT CO LLCa6623968ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - FORD MOTOR CREDIT CO LLCa6623968ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - FORD MOTOR CREDIT CO LLCa6623968ex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
(Mark One)
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to ____________________

Commission file number 1-6368

Ford Motor Credit Company LLC
(Exact name of registrant as specified in its charter)

Delaware
38-1612444
(State of organization)
(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip code)

Registrant’s telephone number, including area code (313) 322-3000

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each Exchange
on which registered
7 1/2% Continuously Offered Bonds for Retail
Accounts due August 20, 2032
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  þ Yes  o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  þ No

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.  þ Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o No

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 Registrant’s 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o
  (Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o Yes  þ No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant.  None of the Shares are publicly traded.
 
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 53
 
 
 
 
 
PART I
ITEM 1. BUSINESS

Overview

Ford Motor Credit Company LLC (referred to herein as “Ford Credit”, the “Company”, “we”, “our” or “us”) was incorporated in Delaware in 1959 and converted to a limited liability company in 2007.  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) of the Securities Exchange Act 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 SEC’s 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.  The predominant share of our business consists of financing Ford vehicles and supporting Ford’s dealers.  We earn our revenue primarily from:

 
·
Payments made under retail installment sale and lease contracts that we originate and purchase;
 
·
Interest supplements and other support payments from Ford and affiliated companies on special-rate financing programs; and
 
·
Payments made under wholesale and other dealer loan financing programs.

As a result of our financing activities, we have a large portfolio of finance receivables and leases which we classify into two segments – consumer and non-consumer.

Finance receivables and leases in the consumer segment relate to products offered to individuals and businesses that finance the acquisition of vehicles from dealers for personal and commercial use.  The financing products include retail installment sale contracts for new and used vehicles, and leases for new vehicles to retail customers, government entities, daily rental companies and fleet customers.

Finance receivables in the non-consumer segment relate primarily to products offered to automotive dealers.  We make loans to dealers to finance the purchase of vehicle inventory (wholesale financing), improvements to dealership facilities, working capital, and the purchase of dealership real estate.  We also purchase receivables generated by divisions and affiliates of Ford, primarily in connection with the sale of parts and accessories by Ford to dealers.

We also service the finance receivables and leases we originate and purchase, make loans to Ford affiliates, and provide insurance services related to our financing programs.

Geographic Scope of Operations and Segment Information.  We conduct our financing operations directly and indirectly 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: North America (“North America Segment”) and 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.  For additional financial information regarding our operations by business segments and operations by geographic regions, see Note 19 of our Notes to the Financial Statements.
 
 
1

 
Item 1. Business (Continued)
 
North America Segment

We do business throughout the United States and Canada.  Our United States operations accounted for 57% and 64% of our total managed receivables at year-end 2010 and 2009, respectively, and our Canadian operations accounted for about 10% and 11% of our total managed receivables at year-end 2010 and 2009, respectively.  Managed receivables include on-balance sheet receivables, excluding unearned interest supplements related to finance receivables, and securitized off-balance sheet receivables that we continue to service.  At December 31, 2010 we did not have any securitized off-balance sheet receivables.  For additional information on how we review our business performance, including on a managed basis, refer to the “Overview” section of Item 7 of Part II of our 10-K Report.

In 2010 in the United States and Canada, under the Ford Credit brand name, we provided financing services to and through dealers of Ford, Lincoln and Mercury brand vehicles.  We also provided financing of non-Ford vehicles sold by these dealers and their affiliates.  The results reported in Item 7 of Part II of our 10-K Report include Mercury, which Ford discontinued in 2010.  Going forward we will provide financing services to and through dealers of Ford and Lincoln brand vehicles and non-Ford vehicles sold by these dealers and their affiliates.

International Segment

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 about 18% and 22% of our total managed receivables at year-end 2010 and 2009, respectively.  Within the International Segment our Europe region accounted for 88% of our managed receivables at year-end 2010 and 2009.  Most of our European operations are managed through a United Kingdom-based subsidiary, FCE Bank plc (“FCE”), which operates in the United Kingdom and has branches in 11 other European countries.  In addition, FCE has operating subsidiaries in Hungary, Poland, and the Czech Republic that provide a variety of wholesale, leasing and retail vehicle financing.  FCE also has subsidiaries in Sweden and the United Kingdom.  In our largest European markets, Germany and the United Kingdom, FCE offers most of our products and services under the Ford Credit/Bank brand.  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 distributors/importers in countries where typically there is no established local Ford presence.  The Worldwide Trade Financing division currently provides financing in over 70 countries.  In addition, other private label operations and alternative business arrangements exist in some European markets.  In the Asia-Pacific region, we operate in Australia and China.  In the Latin America region, we operate in Mexico, Brazil, and Argentina.  We have joint ventures with local financial institutions and other third parties in various locations around the world.

Dependence on Ford

The predominant share of our business consists of financing Ford vehicles and supporting Ford dealers.  Any extended reduction or suspension of Ford’s 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 Ford’s business, operations, production, sales and risks can be found in Ford’s Annual Report on Form 10-K for the year ended December 31, 2010 (“Ford’s 2010 10-K Report”), filed separately with the SEC and incorporated by reference as an exhibit to our 2010 10-K 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 increase our financing volume and share of financing sales of Ford vehicles.  For additional information regarding interest supplements and other support costs earned from affiliated companies, see Note 18 of our Notes to the Financial Statements.

 
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Item 1. Business (Continued)
 
Competition

The automotive financing business is highly competitive due in part to web-based credit aggregation systems that permit dealers to send, through standardized systems, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources.  Our principal competitors are:

·
Banks
·
Independent finance companies
·
Credit unions and savings and loan associations
·
Leasing companies
·
Other automobile manufacturers’ affiliated finance companies

We compete mainly on the basis of service and financing rate programs, including those sponsored by Ford.  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 policies we have built strong relationships with Ford’s 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 efficiently accessing the capital markets.  We routinely monitor the capital markets and develop funding alternatives to optimize our competitive position.  Ford sponsored special-rate financing programs available only through us gives us a competitive advantage in providing financing to Ford dealers and their customers.

Seasonal Variations

As a finance company, we own and manage a large portfolio of receivables 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.

Consumer Financing

Overview and Purchasing Process

We provide financing services to customers for personal and commercial use 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 Ford and Lincoln dealers.  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 net investment in operating leases with the capitalized cost of the vehicles recorded as depreciable assets.

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.  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 analytical data and our written guidelines.

Retail Financing

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, rebate 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 limited portion of the finance charge.

 
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Item 1. Business (Continued)
 
We offer a variety of retail installment sale financing products.  In the United States, retail installment sale contract terms for new Ford and Lincoln brand vehicles range primarily from 24 to 72 months.  The average original term of our retail installment sale contracts was 59 months and 58 months in the United States for contracts purchased in 2010 and 2009, respectively.  A small portion of our retail installment sale contracts have non-uniform payment periods and payment amounts to accommodate special cash flow situations.  We also offer a retail balloon product in Europe under which the retail customer may finance their vehicle with an installment sale contract with a series of monthly payments followed by paying the amount remaining in a single balloon payment.  The 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 Ford and non-Ford dealers through auctions.  Customers who choose our retail balloon product may also qualify for special-rate financing offers from Ford.

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 customer’s payments current, we generally can repossess the customer’s 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.

Net Investment in Operating Leases

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 North America through dealers of Ford and Lincoln brands.  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, the 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 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 Ford and non-Ford dealers through auctions.

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 and Lincoln brand vehicles range primarily from 24 to 48 months.  In 2010 and 2009, the average original lease term for contracts purchased was 33 months and 37 months, respectively.

Direct Financing Leases and Other Operating Lease Vehicle Financing

We offer vehicle-financing programs to retail and commercial customers including leasing companies, government entities and fleet customers.  These financings include primarily lease plans for terms of 24 to 60 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 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, the lease customer may be paid the excess amount.  These financings are included in our consumer segment and reported as direct financing leases or net investment in operating leases in our financial statements.  For certain commercial financing programs, we have alternative business arrangements whereby we provide marketing and sales support and funding is provided by a third party.
 
 
4

 
Item 1. Business (Continued)
 
Non-Consumer Financing

Overview

We extend commercial credit to franchised dealers selling Ford and Lincoln vehicles primarily in the form of approved lines of credit to purchase new and used vehicles.  Each commercial lending request is evaluated, taking into consideration the borrower’s financial condition, supporting security, and numerous other financial and qualitative factors.  All credit exposures are scheduled for review at least annually.  Generally receivables are secured by the related vehicle or the related property and may also be secured by other dealer assets.  Asset verification processes are in place and include physical audits of vehicle inventories with increased audit frequency for higher risk dealers.

Wholesale Financing

We offer a wholesale financing program for qualifying dealers to finance new and used vehicles held in inventory.  We generally finance the vehicle’s wholesale invoice price for new vehicles and up to 100% of the dealer’s purchase price for used vehicles.  Dealers generally pay a floating interest rate on wholesale loans.  In the United States, the average wholesale receivable, excluding the time the vehicle was in transit from the assembly plant to the dealership, was outstanding for 49 days in 2010 compared with 72 days in 2009.  Our wholesale financing program includes financing of large multi-brand 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 (“TARIC”), generally provides insurance for vehicle damage and theft of vehicles held in dealer inventory that are financed by us.

Dealer Loans

We make loans to dealers for improvements to dealership facilities, working capital and the purchase and financing of dealership real estate.  These loans are included in dealer loans in our financial statements.  These loans typically are secured by mortgages on dealership real estate, secured interests in other dealership assets and sometimes personal guarantees from the individual owners of the dealership.

Other Financing

We also purchase certain receivables generated by divisions and affiliates of Ford, primarily in connection with the sale of parts and accessories by Ford to dealers and the purchase of other receivables generated by Ford.  These receivables are included in other finance receivables in our financial statements.

Marketing and Special Programs

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.  Our marketing strategy is based 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, and ongoing communications 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.  We also emphasize the quality of our customer service and the ease of making payments and transacting business with us.  For example, through our web site located at www.fordcredit.com, a customer can make inquiries, review an account balance, examine current incentives, schedule an electronic payment, or qualify for a pre-approved credit offer.

 
5

 
Item 1. Business (Continued)
 
We also market our non-consumer financial services 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.

Servicing

General.  After we purchase retail installment sale contracts and leases from dealers and other customers, we manage the contracts during their contract terms.  This management process is called servicing.  We service the finance receivables and leases we originate and purchase.  Our servicing duties include the following:
 
·          applying monthly payments from customers;
·          contacting delinquent customers for payment;
·          maintaining a security interest in the financed vehicle;
·          monitoring insurance coverage for lease vehicles in certain states;
·          providing billing statements to customers;
·          responding to customer inquiries;
·          releasing the secured interest on paid-off finance contracts;
·          arranging for the repossession of vehicles; and
·          selling repossessed and returned vehicles at auction.
 
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 auto-dialing technology and proprietary collection and workflow operating systems.  Our United States 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.

Supplier Operations.  We engage vendors to perform many of our servicing processes.  These processes include depositing monthly payments from customers, monitoring the perfection of security interests in financed vehicles, monitoring insurance coverage on lease vehicles in certain states, imaging of contracts and electronic data file maintenance, generating retail and lease billing statements, providing telephonic payment systems for retail customers, handling of some inbound customer service calls, handling of some inbound and outbound collections calls, and recovering deficiencies for selected accounts.

Payment Extensions.  We may offer payment extensions to customers who have encountered temporary financial difficulty that limits their ability to pay as contracted.  Each month about 1-2% of our U.S. retail contracts outstanding are granted payment extensions.  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 customer’s account is no longer delinquent.  Before agreeing to a payment extension, the service representative reviews the customer’s payment history, current financial situation, and assesses the customer’s desire and capacity to make future payments.  The service representative decides whether the proposed payment extension complies with our policies and guidelines.  Regional business center managers review, and generally must approve, payment extensions outside these guidelines.

 
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Item 1. Business (Continued)
 
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 usually sell repossessed vehicles at auction and apply the proceeds to the amount owed on the customer’s account.  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.

We manage 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.  Repossessed vehicles are sold at open auctions.  Returned leased vehicles are sold at open auctions, in which any licensed dealer can participate and at closed auctions, in which only Ford dealers may participate.
 
Wholesale and Commercial.  In the United States and Canada, we require dealers to submit monthly financial statements that we monitor for potential credit deterioration.  We assign an evaluation rating to each dealer, which among other things determines the frequency of physical audits of vehicle inventory.  We electronically audit vehicle inventory utilizing integrated systems allowing us to access information from Ford reported sales.  We monitor dealer inventory financing payoffs daily to detect deviations from typical repayment patterns and take appropriate actions.  We 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 governed by the respective regional offices, executed within the local markets, and similar risk management principles are applied.

Insurance

We conduct insurance operations primarily through TARIC 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:

 
  ·
  Contractual liability insurance on extended service contracts and, in the state of Florida, extended service plan contracts;
 
  ·
  Physical damage insurance covering vehicles at dealers’ locations and vehicles in-transit between final assembly plants and dealers’ locations; and
 
  ·
  Physical damage/liability reinsurance covering Ford dealer daily rental vehicles.
 
  ·
  Commercial auto liability insurance in the United States (14 states) for Ford to support business operations.

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 has provided 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.  Premiums from our insurance business generated approximately 1% of our total revenues in 2010 and 2009.

Employee Relations

Our worldwide full-time employees were approximately 7,000 and 8,200 at year-end 2010 and 2009, respectively.  Most of our employees are salaried, and most are not represented by a union.  We consider employee relations to be satisfactory.

During 2010, we reduced our worldwide staffing by about 1,200 positions to improve cost structure in response to lower automotive industry sales volumes and the discontinuation of financing for Jaguar, Land Rover, Mazda, and Volvo.  This was in addition to the elimination of about 2,000 worldwide positions during 2009.

 
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Item 1. Business (Continued)
 
Governmental Regulations

As a finance company, we are highly regulated by the governmental authorities in the locations where we operate.

United States

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 purchasers 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 due at lease inception, the terms for payment, and information about lease charges, insurance, excess mileage, wear and use charges, and liability on early termination.  The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants and customers 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 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 Servicemember’s Civil Relief Act that prohibits us from charging interest in excess of 6% on transactions with customers who subsequently enter into full-time service with the military and request such interest rate modification, 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 confidentiality and safeguard 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 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.  In certain states, we are subject to periodic examination by state regulatory authorities.

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 rights that require us to return a repossessed vehicle to the customer in certain circumstances.  Our ability to repossess and sell a repossessed vehicle is restricted if a customer declares bankruptcy.

International

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 by the U.K. Financial Services Authority (“FSA”) to carry on a range of regulated activities within the UK and through a branch network in eleven other European countries, and is subject to consolidated supervision by the FSA.  FCE also holds a standard license under the U.K. Consumer Credit Act of 1974 and other licenses to conduct financing business in other European locations.  Since 1993, FCE has obtained authorizations from the Bank of England (now the FSA) pursuant to the Banking Consolidation Directive entitling it to operate through a European branch network and operate branches in 11 countries.  In many other locations where we operate, governmental authorities require us to obtain licenses to conduct our business.

 
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Item 1. Business (Continued)
 
Regulatory Compliance Status

We believe that we maintain all material licenses and permits required for our current operations and are in compliance with all material 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 in the legislative and administrative rule-making process on regulatory initiatives that impact finance companies.  The cost of our ongoing compliance efforts has not had a material adverse effect on our operations, financial condition, or liquidity.

Transactions with Ford and Affiliates

On November 6, 2008, we and Ford entered into an Amended and Restated Support Agreement (“Support Agreement”).  Pursuant to the Support Agreement, if our managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in our most recent Form 10-Q Report or Form 10-K Report), we can require Ford to make or cause to be made a capital contribution to us in an amount sufficient to have caused such managed leverage to have been 11.5 to 1.  A copy of the Support Agreement was filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and is incorporated by reference herein as an exhibit.  No capital contributions have been made to us pursuant to the Support Agreement.  In addition, we have an agreement to maintain FCE’s net worth in excess of $500 million.  No payments have been made to FCE pursuant to the agreement during the 2001 through 2010 periods.

We entered into an Amended and Restated Agreement with Ford dated December 12, 2006 relating to our set-off arrangements and long-standing business practices with Ford, a copy of which was included in our Form 8-K dated the same date and is incorporated by reference herein as an exhibit.  The principal terms of this agreement include the following:

 
·
In certain circumstances, our obligations to Ford may be set-off against Ford’s obligations to us;
 
·
Any extension of credit from us to Ford or any of Ford’s automotive affiliates will be on arm’s length terms and will be enforced by us in a commercially reasonable manner;
 
·
We will not guarantee more than $500 million of the indebtedness of, make any investments in, or purchase any real property or manufacturing equipment classified as an automotive asset from Ford or any of Ford’s automotive affiliates;
 
·
We and Ford agree to maintain our shareholder’s interest at a commercially reasonable level to support the amount, quality and mix of our assets taking into account general business conditions affecting us;
 
·
We will not be required by Ford or any of Ford’s automotive affiliates to accept credit or residual risk beyond what we would be willing to accept acting in a prudent and commercially reasonable manner (taking into consideration any interest rate supplements or residual value support payments, guarantees, or other subsidies that are provided to us by Ford or any of Ford’s automotive affiliates); and
 
·
We and Ford are separate, legally distinct companies, and we will continue to maintain separate books and accounts.  We will prevent our assets from being commingled with Ford’s assets, and hold ourselves out as a separate and distinct company from Ford and Ford’s automotive affiliates.

More information about transactions between us and Ford and other affiliates is contained in Note 18 of our Notes to the Financial Statements, “Business — Overview”, “Business — Retail Financing”, “Business — Other Financing” and the description of Ford’s business in Exhibit 99.
 
 
9

 
ITEM 1A. RISK FACTORS

We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors applicable to us:

A Prolonged Disruption of the Debt and Securitization Markets –If there is a prolonged disruption of the debt and securitization markets, we would consider reducing the amount of receivables we purchase or originate.  A significant reduction in the amount of receivables we purchase or originate would significantly reduce our ongoing profits, and could adversely affect our ability to support the sale of Ford vehicles.  To the extent our ability to provide wholesale financing to Ford’s dealers or retail financing to those dealers’ customers is limited, Ford’s ability to sell vehicles could be adversely affected.

Inability to Access Debt, Securitization or Derivative Markets Around the World at Competitive Rates or in Sufficient Amounts due to Credit Rating Downgrades, Market Volatility, Market Disruption or Otherwise – In 2005 and 2006,  the credit ratings assigned to us were lowered to below investment grade, which increased our unsecured borrowing costs and restricted our access to the unsecured debt markets.  In response, we increased our use of securitization transactions (including other structured financings) and other sources of funding.  In 2010, although we experienced several credit rating upgrades and our credit spreads narrowed considerably, our credit ratings are still below investment grade.  Our higher credit ratings have provided us more economical access to the unsecured debt markets, but we are still utilizing asset-backed securitization transactions for a substantial amount of our funding.

Our ability to obtain funding under our committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk.  Over time, and particularly in the event of any credit rating downgrades, market volatility, market disruption, or other factors, we may reduce the amount of receivables we purchase or originate because of funding constraints.  In addition, we may reduce the amount of receivables we purchase or originate if there is a significant decline in the demand for the types of securities we offer or we are unable to obtain derivatives to manage the interest rate risk associated with our securitization transactions.  A significant reduction in the amount of receivables we purchase or originate would significantly reduce our ongoing profits, and could adversely affect our ability to support the sale of Ford vehicles.  For additional information on market risk, refer to the “Market Risk” section of Item 7A of Part II of our 10-K Report.

Higher-Than-Expected Credit Losses – Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms.  Credit risk (which is heavily dependent upon economic factors, including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used vehicle prices) has a significant impact on our business.  Our credit losses could exceed our expectations and adversely affect our financial condition and results of operations.

Lower-Than-Anticipated Residual Values or Higher-Than-Expected Return Volumes for Leased Vehicles – We project expected residual values (including residual value support payments from Ford) and return volumes of the vehicles we lease.  Actual proceeds realized by us upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction to us.  Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions and the quality or perceived quality, safety or reliability of the vehicles.  Actual return volumes may be higher than expected and can be influenced by contractual lease-end values relative to auction values, marketing programs for new vehicles, and general economic conditions.  All of these, alone or in combination, have the potential to adversely affect our profitability.

 
10

 
Item 1A. Risk Factors (Continued)

Increased Competition from Banks or Other Financial Institutions Seeking to Increase Their Share of Financing Ford Vehicles – No single company is a dominant force in the automotive finance industry.  Most of our bank competitors in the United States use credit aggregation systems that permit dealers to send, through standardized systems, 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.  In addition, we may face increased competition on wholesale financing for Ford dealers.  Competition from such competitors with lower borrowing costs may increase, which could adversely affect our profitability and the volume of our business.

Fluctuations in Foreign Currency Exchange Rates and Interest Rates – We are exposed to the effects of changes in foreign currency exchange rates and interest rates.  Changes in currency exchange rates and interest rates cannot always be predicted or hedged.  As a result, substantial unfavorable changes in foreign currency exchange rates or interest rates could have a substantial adverse effect on our financial condition and results of operation.

Collection and Servicing Problems Related to Our Finance Receivables and Net Investment in Operating Leases – After we purchase retail installment sale contracts and leases from dealers and other customers, we manage or service the receivables.  Any disruption of our servicing activity, due to inability to access or accurately maintain our customer account records or otherwise, could have a significant negative impact on our ability to collect on those receivables and/or satisfy our customers.

New or Increased Credit, Consumer or Data Protection, or Other Regulations Could Result in Higher Costs and/or Additional Financing Restrictions – As a finance company, we are highly regulated by governmental authorities in the locations where we operate.  In the United States, our operations are subject to regulation, supervision and licensing under various federal, state, and local laws and regulations, including the federal Truth-in-Lending Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act.  In some countries outside the United States, our subsidiaries are regulated banking institutions and are required, among other things, to maintain minimum capital reserves.  In many other locations, governmental authorities require companies to have licenses in order to conduct financing businesses.  Efforts to comply with these laws and regulations impose significant costs on us, and affect the conduct of our business.  Additional regulation could add significant cost or operational constraints that might impair the profitability of our business.

The Imposition of Additional Costs or Restrictions Due to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) and its Implementing Rules and Regulations – The Act was enacted on July 21, 2010 to reform practices in the financial services industries, including automotive financing and securitizations.  The Act directs federal agencies to adopt rules to regulate the consumer finance industry and the capital markets, including certain commercial transactions such as derivatives contracts.  Among other things, the Act creates a Consumer Financial Protection Bureau with broad rule-making authority for a wide range of consumer protection laws that will regulate consumer finance businesses, such as our retail automotive financing business in the United States.  The Act also creates an alternative liquidation framework under which the Federal Deposit Insurance Corporation (“FDIC”) may be appointed as receiver of a non-bank financial company if the U.S. Treasury Secretary (in consultation with the President of the United States) determines that it is in default or danger of default and the resolution of the company under other applicable law (e.g., U.S. bankruptcy law) would have serious adverse effects on the financial stability of the United States.  The FDIC’s powers under this framework may vary from those of a bankruptcy court under U.S. bankruptcy law, which could adversely impact securitization markets, including our funding activities, regardless of whether we are ever determined to be subject to the Act’s alternative liquidation framework.

In addition, the Act provides that a finance company could be designated a “significant non-bank financial company” by the Financial Stability Oversight Council and thus be subject to regulation by the Board of Governors of the Federal Reserve System.  Such a designation would mean that a non-bank finance company, in effect, could be regulated like a bank with respect to capital and other requirements, but without the benefits of being a bank - such as the ability to offer FDIC-insured deposits.  Further, the Act prohibits the use of credit ratings in a prospectus (which is required to be included for securitization offerings such as those conducted by us) without the consent of the rating agency.  The rating agencies have indicated they will not consent to such inclusion.  The SEC has provided indefinite relief from this requirement for public offerings of asset-backed securities through a no-action letter.  Without such relief, the public securitization markets would be impaired in the United States.

Federal agencies are given significant discretion in drafting the rules and regulations necessary to implement the Act, and, consequently, the effects of the Act on the capital markets and the consumer finance industry may not be known for months or years.  The Act and its implementing rules and regulations could impose additional costs on us and adversely affect our ability to conduct our business.

 
11

 
Item 1A. Risk Factors (Continued)
 
Changes in Ford’s Operations or Changes in Ford’s Marketing Programs Could Result in a Decline in Our Financing Volumes – Most of our business consists of financing Ford vehicles and supporting Ford dealers.  If there were significant changes in the production or sales of Ford vehicles to retail customers, the quality or resale value of Ford vehicles, or other factors impacting Ford or its employees, such changes could significantly affect our profitability and financial condition.  In addition, for many years, Ford has sponsored special-rate financing programs available only through us.  Under these programs, Ford makes interest supplements or other support payments to us.  These programs increase our financing volume and share of financing sales of Ford vehicles.  If Ford were to adopt marketing strategies in the future that de-emphasized such programs in favor of other incentives, our financing volume could be reduced.

Inability to Obtain Competitive Funding – Other institutions that provide automotive financing to certain of Ford’s competitors have access to relatively low-cost government-insured or other funding.  For example, financial institutions with bank holding company status may have access to other lower cost sources of funding.  Access by these competitors’ dealers and customers to financing provided by financial institutions with relatively low-cost funding that is not available to us could adversely affect our ability to support the sale of Ford vehicles at competitive cost and rates.

Failure of Financial Institutions to Fulfill Commitments Under Committed Credit and Liquidity Facilities – As included in the “Liquidity” section of Item 7 of Part II of our 10-K Report, at December 31, 2010, we had $34.3 billion of committed liquidity programs, asset-backed commercial paper, and credit facilities of which $15.8 billion were utilized leaving $18.5 billion available for use for which we pay commitment fees.  To the extent the financial institutions that provide these committed facilities and programs were to default on their obligation to fund the commitments, these facilities and programs would not be available to us.

We are Jointly and Severally Responsible with Ford and its Other Subsidiaries for Funding Obligations Under Ford’s and its Subsidiaries’ Qualified U.S. Defined Benefit Pension Plans – Pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), we are jointly and severally liable to the Pension Benefit Guaranty Corporation (“PBGC”) for certain Ford IRS-qualified U.S. defined benefit pension plan liabilities and to any trustee appointed if one or more of these pension plans were to be terminated by the PBGC in a distress termination.  We are liable to pay any plan deficiencies and could have a lien placed on our assets by the PBGC to collateralize this liability.  Our financial condition and ability to repay unsecured debt could be materially adversely affected if we were required to pay some or all of these obligations.

Inherent Limitations of Internal Controls Impacting Financial Statements and Safeguarding of Assets.  Our internal control over financial reporting and our operating internal controls may not prevent or detect misstatements or loss of assets because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy and safeguarding of assets.

 
12

 
ITEM 1B. UNRESOLVED STAFF COMMENTS

We have none to report.

ITEM 2. PROPERTIES

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 business centers are located in leased properties.  The continued use of any of these leased properties is not material to our operations.  At December 31, 2010 our total future rental commitment under leases of real property was $58 million.

We operate in the United States through four regional business centers and two centers in Canada.

United States:
Colorado Springs, Colorado
Greenville, South Carolina
 
Tampa, Florida
Nashville, Tennessee
     
Canada:
Edmonton, Alberta
Oakville, Ontario

Each of the U.S. centers generally services dealers and customers located within its region.  All of our U.S. business centers are electronically linked and workload can be allocated across these centers.  In addition, our Canadian business centers share a similar electronic linkage and workload allocation capability.

We also have five specialty centers in North America that focus on specific activities:

 
·
Customer Service Center — Omaha, Nebraska;
 
·
Loss Prevention Centers — Henderson, Nevada and Irving, Texas;
 
·
National Bankruptcy Service Center — Dearborn, Michigan; and
 
·
National Recovery Center — Mesa, Arizona.

On January 20, 2011 we announced the loss prevention center in Henderson, Nevada will cease operations by March 31, 2011.

In Europe, we have dealer and 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.
 
 
13

 
ITEM 3. LEGAL PROCEEDINGS

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, personal injury matters, investor matters, financial reporting matters, and other contractual relationships.  Some of these matters are class actions or matters where the plaintiffs 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.  We have no significant pending legal proceedings.

Litigation is subject to many uncertainties and the outcome is not predictable.  It is reasonably possible that matters could be decided unfavorably to us.  Although the amount of liability at December 31, 2010 with respect to litigation 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 affect on our operations, financial condition, and liquidity.  For a discussion of pending significant cases against Ford, see Item 3 in Ford’s 2010 10-K Report.

PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
At December 31, 2010, all of our Shares were owned by Ford Holdings, LLC, a wholly owned subsidiary of Ford.  We did not issue or sell any equity interests during 2010, and there is no market for our Shares.  In 2010, we paid cash distributions of $2.5 billion.  In 2009, we made $1.5 billion of cash and non-cash distributions.  Our Shares are pledged as collateral for Ford’s secured credit facilities.

ITEM 6. SELECTED FINANCIAL DATA

Not Required.

 
14

 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview

Our primary focus is to profitably support the sale of Ford Motor Company vehicles.  We work with Ford to maximize customer and dealer satisfaction and loyalty, aiming to provide a full complement of financing products and outstanding service.  We continually improve processes focusing on the customer and the dealer and ensure the efficient use of capital.  In addition, we manage costs so that they are proportionate to the overall size of our business.  As a result, Ford Credit is uniquely positioned to drive incremental sales, improve customer satisfaction and owner loyalty to Ford, and direct profits and distributions back to Ford to support its product programs and its overall business.

We leverage three fundamental strategies in the management of our operations.  The first is to employ prudent origination practices while maintaining a managed level of risk.  The second is efficient and effective servicing and collection practices.  The third is to fund the business efficiently while managing our balance sheet risk.

Origination:  Buy it Right, Price it Right – Our originations activities focus on Ford Motor Company’s automotive brands.  We will continue to work closely with our brand partners to create value for dealers and customers by going to the marketplace together, leveraging our unique position as Ford’s finance company.  We are focused on the Ford and Lincoln brands, following Ford’s discontinuation of Mercury in 2010 and our discontinuation of financing for Jaguar, Land Rover, Volvo and Mazda in recent years.  Risk management remains key to our continued value and profitability. We have extensive risk experience and large sample sizes, enabling us to develop proprietary scoring models that outperform generic scoring models.   Our sales teams provide dealership level account management (finance and insurance consulting and vehicle sales assistance) by reviewing key dealership sales and operating metrics with our dealers to identify potential profit and customer satisfaction improvement opportunities.  Through these efforts, we expect to generate incremental vehicle sales for Ford.

Servicing:  Operate Efficiently, Collect Effectively, Enhance Owner Loyalty – Our operations will continue to drive efficiencies globally by improving and commonizing our business processes and information technology platforms.  We continually enhance our collection modeling capabilities to more effectively manage risk and cost.  These models allow for more focused collection activity on higher risk accounts and further refine our risk-based staffing model to ensure collection resources are aligned with portfolio risk.  We have robust processes that produce superior customer satisfaction and ownership loyalty.

Funding: Fund it Efficiently, Manage Risk – Our funding strategy is to have sufficient liquidity to enable us to profitably support Ford, its dealers and customers in all economic environments.  We maintain a substantial cash balance, committed funding capacity and access to diverse funding sources and we also manage interest rate and currency risks.  Our credit ratings have improved in 2010 although we remain below investment grade.  As a result, securitization continues to represent a substantial portion of our funding mix as this remains more cost effective than unsecured funding and allows us access to a wider investor base.  For an additional discussion of our 2011 funding plan, refer to the “Funding — Term Funding Plan” and “Quantitative and Qualitative Disclosures About Market Risk” sections of Item 7 and Item 7A, respectively, of Part II of our 10-K Report.
 
 
15

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Generation of Revenue, Income and Cash

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:

 
·
the volume of new and used vehicle sales and leases;
 
·
the extent to which we purchase retail installment sale and lease contracts and the extent to which we provide wholesale financing;
 
·
the sales price of the vehicles financed;
 
·
the level of dealer inventories;
 
·
Ford-sponsored special-rate financing programs available exclusively through us; and
 
·
the availability of cost-effective funding for the purchase of retail installment sale and lease contracts and to provide wholesale financing.

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.

Business Performance

We review our business performance from several perspectives, including:

 
·
On-balance sheet basis – includes the finance receivables and leases we own and securitized receivables and leases that remain on our balance sheet (includes other structured financings and factoring transactions that have features similar to securitization transactions);
 
·
Securitized off-balance sheet basis – includes receivables sold in securitization transactions that, when sold, do not remain on our balance sheet (off-balance sheet receivables were zero at December 31, 2010);
 
·
Managed basis – includes on-balance sheet receivables, excluding unearned interest supplements related to finance receivables, and securitized off-balance sheet receivables that we continue to service; and
 
·
Serviced basis – includes managed receivables and leases, and receivables sold in whole-loan sale transactions where we retain no interest in the sold receivables, but which we continue to service.

We analyze our financial performance primarily on a managed and on-balance sheet basis.  We retained interests in receivables sold in off-balance sheet securitization transactions and, with respect to subordinated retained interests, we had 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.  At December 31, 2010 we did not have any securitized off-balance sheet receivables.  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 delinquencies, 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 gains and losses related to market valuation adjustments to derivatives primarily related to movements in interest rates, 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 additional information regarding our segments, see Note 19 of our Notes to the Financial Statements.
 
 
16

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Results of Operations

Full Year 2010 Compared with Full Year 2009

In 2010, our net income was about $2 billion, compared with net income of $1.3 billion in 2009.  On a pre-tax basis, we earned $3.1 billion in 2010, compared with earnings of $2 billion in 2009.  The improvement in pre-tax earnings primarily reflected:

 
·
A lower provision for credit losses primarily related to a lower allowance for credit losses and improved charge-off performance (about $1.2 billion);
 
·
Lower depreciation expense for leased vehicles due to higher auction values (about $580 million);
 
·
Higher financing margin primarily attributable to lower borrowing costs (about $180 million);
 
·
Lower operating costs (about $115 million); and
 
·
The non-recurrence of a valuation allowance for Australian finance receivables sold in 2009 (about $50 million).

These factors were offset partially by:

 
·
Lower volume primarily related to lower average receivables (about $440 million);
 
·
The non-recurrence of net gains related to unhedged currency exposure primarily from cross-border intercompany lending (about $320 million);
 
·
Higher net losses related to debt calls and repurchases (about $160 million); and
 
·
The non-recurrence of net gains related to market valuation adjustments to derivatives, shown as unallocated risk management in the table below ($135 million).

Results of our operations by business segment and unallocated risk management for 2010 and 2009 are shown below:

   
Full Year
 
   
 
2010
   
 
2009
   
2010
Over/(Under)
2009
 
Income/(Loss) before income taxes
 
(in millions)
 
North America Segment
  $ 2,785     $ 1,905     $ 880  
International Segment
    354       46       308  
Unallocated risk management
    (85 )     50       (135 )
  Income before income taxes
    3,054       2,001       1,053  
Provision for income taxes and Gain on disposal of discontinued operations
    1,106       722       384  
Net income
  $ 1,948     $ 1,279     $ 669  

The increase in North America Segment pre-tax earnings primarily reflected a lower provision for credit losses, improved residual performance on returned vehicles, lower operating costs, and higher financing margin.  These factors were offset partially by lower volume, the non-recurrence of net gains related to unhedged currency exposure primarily from cross-border intercompany lending, and higher net losses related to debt repurchases.

The increase in International Segment pre-tax results primarily reflected a lower provision for credit losses, improved margin, the non-recurrence of a valuation allowance for Australian finance receivables sold in 2009, and lower losses on residual-based products.  These factors were offset partially by lower volume.

The change in unallocated risk management income reflected net losses related to market valuation adjustments to derivatives.  For additional information on our unallocated risk management, see Note 19 of our Notes to the Financial Statements.

 
17

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Full Year 2009 Compared with Full Year 2008

In 2009, our net income was $1.3 billion, compared with a net loss of $1.5 billion in 2008.  On a pre-tax basis, we earned $2 billion in 2009, compared with a loss of $2.6 billion in 2008.  The improvement in pre-tax earnings primarily reflected:

 
·
The non-recurrence of the 2008 impairment charge to our North America Segment operating lease portfolio (about $2.1 billion);
 
·
Lower depreciation expense for leased vehicles and lower residual losses on returned vehicles due to higher auction values (about $1.9 billion);
 
·
A lower provision for credit losses primarily related to non-recurrence of higher severity offset partially by higher repossessions (about $800 million);
 
·
The non-recurrence of net losses related to market valuation adjustments to derivatives, shown as unallocated risk management in the table below ($367 million);
 
·
Net gains related to unhedged currency exposure primarily from cross-border intercompany lending (about $320 million);
 
·
Lower net operating costs (about $200 million); and
 
·
Higher financing margin primarily attributable to lower borrowing costs (about $100 million).

These factors were offset partially by:

 
·
Lower volume primarily reflecting lower industry volumes, lower dealer stocks, the impact of divestitures and alternative business arrangements, and changes in currency exchange rates (about $1 billion);
 
·
The non-recurrence of the gain related to the sale of approximately half of our ownership interest in our Nordic operations (about $100 million); and
 
·
A valuation allowance for Australian finance receivables sold in 2009 (about $50 million).

For additional information on the 2008 impairment charge, refer to the “Results of Operations — Impairment of Net Investment in Operating Leases” section of Item 7 of Part II of our 10-K Report for the period ending December 31, 2009.

Results of our operations by business segment and unallocated risk management for 2009 and 2008 are shown below:

   
Full Year
 
   
 
2009
   
 
2008
   
2009
Over/(Under)
2008
 
Income/(Loss) before income taxes
 
(in millions)
 
North America Segment
  $ 1,905     $ (2,749 )   $ 4,654  
International Segment
    46       507       (461 )
Unallocated risk management
    50       (317 )     367  
  Income/(Loss) before income taxes
    2,001       (2,559 )     4,560  
Provision for/(Benefit from) income taxes and Gain on disposal of discontinued operations
    722       (1,023 )     1,745  
Net income/(loss)
  $ 1,279     $ (1,536 )   $ 2,815  

The improvement in North America Segment pre-tax earnings primarily reflected non-recurrence of the impairment charge for operating leases, lower depreciation expense for leased vehicles and lower residual losses on returned vehicles due to higher auction values, a lower provision for credit losses, net gains related to unhedged currency exposure from cross-border intercompany lending, higher financing margin, and lower operating costs.  These factors were offset partially by lower volume.

The decrease in International Segment pre-tax earnings primarily reflected lower volume, a higher provision for credit losses primarily reflecting losses in Spain and Germany, lower financing margin primarily in Mexico, non-recurrence of a gain related to the sale of approximately half of our ownership interest in our Nordic operations, and a valuation allowance for Australian finance receivables sold in 2009.  These factors were offset partially by lower operating costs.

 
18

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
The change in unallocated risk management income reflected the non-recurrence of net losses related to market valuation adjustments to derivatives primarily related to movements in interest rates.  For additional information on our unallocated risk management, see Note 19 of our Notes to the Financial Statements.

Placement Volume and Financing Share

Total worldwide consumer financing contract placement volumes for new and used vehicles are shown below:

   
Full Year
 
 
 
2010
   
2009
   
2008
 
   
(in thousands)
 
North America Segment                         
United States
    713       591       1,043  
Canada
    113       85       149  
Total North America Segment
    826       676       1,192  
                         
International Segment                         
Europe
    354       468       629  
Other international
    38       49       129  
Total International Segment
    392       517       758  
                         
Total contract placement volume
    1,218       1,193       1,950  
 
Shown below are our financing shares of new Ford, Lincoln and Mercury brand vehicles sold by dealers in the United States and new 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:
 
   
Full Year
 
   
2010
   
2009
   
2008
 
United States                        
Financing share – Ford, Lincoln and Mercury
                       
Retail installment and lease
    32 %     29 %     39 %
Wholesale
    81       79       77  
                         
Europe                        
Financing share - Ford
                       
Retail installment and lease
    26 %     28 %     28 %
Wholesale
    99       99       98  
 
North America Segment

In 2010, our total contract placement volumes were 826,000, up 150,000 contracts from a year ago.  This increase primarily reflected higher sales of new Ford, Lincoln and Mercury vehicles and higher Ford, Lincoln and Mercury financing share.  Higher Ford, Lincoln and Mercury financing share was primarily explained by changes in Ford’s marketing programs that favored us.

International Segment

In 2010, our total contract placement volumes were 392,000, down 125,000 contracts from a year ago.  This decrease primarily reflected the discontinuation of financing for Jaguar, Land Rover, Mazda, and Volvo, the non-recurrence of government vehicle scrappage programs in Europe, and the transition of Mexico’s retail financing business to another finance provider.
 
 
19

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Financial Condition

Finance Receivables and Operating Leases

Our finance receivables and operating leases are shown below:

   
December 31,
 
   
2010
   
2009
   
2008
 
   
(in billions)
 
Receivables – On-Balance Sheet
                 
Finance receivables – North America Segment
                 
Consumer
                 
Retail installment and direct financing leases
  $ 39.1     $ 42.3     $ 49.5  
Non-Consumer
                       
Wholesale
    13.3       13.3       14.0  
Dealer Loan and other
    1.9       1.9       2.2  
  Total North America Segment – finance receivables (a)
    54.3       57.5       65.7  
Finance receivables - International Segment
                       
Consumer
                       
Retail installment and direct financing leases
    10.6       14.0       16.0  
Non-Consumer
                       
Wholesale
    8.7       9.1       13.7  
Dealer Loan and other
    0.4       0.5       0.6  
  Total International Segment – finance receivables (a)
    19.7       23.6       30.3  
Unearned interest supplements
    (1.9 )     (1.9 )     (1.3 )
Allowance for credit losses
    (0.8 )     (1.3 )     (1.4 )
  Finance receivables, net
    71.3       77.9       93.3  
Net investment in operating leases (a)
    10.0       14.6       22.5  
Total receivables – on-balance sheet (b)
  $ 81.3     $ 92.5     $ 115.8  
                         
Memo:
                       
Total receivables – managed (c)
  $ 83.2     $ 94.5     $ 117.7  
Total receivables – serviced (d)
    83.2       94.6       118.0  
                         
 
(a)
At December 31, 2010 and 2009, includes consumer receivables before allowance for credit losses of $35.8 billion and $44.9 billion, respectively, and non-consumer receivables before allowance for credit losses of $18.7 billion and $19.5 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be included in our consolidated financial statements.  In addition, at December 31, 2010 and 2009, includes net investment in operating leases before allowance for credit losses of $6.2 billion and $10.4 billion, respectively, that have been included in securitization transactions but continue to be included in our financial statements.  These underlying securitized assets are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors.  We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions.  For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections of Item 7 of Part II of our 10-K Report and Note 6 of our Notes to the Financial Statements.
(b)
Includes allowance for credit losses of $854 million and $1.5 billion at December 31, 2010 and 2009, respectively.
(c)
Includes on-balance sheet receivables, excluding unearned interest supplements related to finance receivables of about $1.9 billion at December 31, 2010 and 2009; and includes off-balance sheet retail receivables of about $100 million at December 31, 2009.
(d)
Includes managed receivables and receivables sold in whole-loan sale transactions where we retain no interest, but which we continue to service of about $100 million at December 31, 2009.
 
Receivables decreased from year-end 2009, primarily reflecting the discontinuation of financing for Jaguar, Land Rover, Mazda, and Volvo and lower industry volumes in recent years.  At December 31, 2010, the Jaguar, Land Rover, Mazda, and Volvo financing portfolio represented about 4% of our managed receivables.  In addition, the Mercury financing portfolio represented about 3% of our managed receivables at December 31, 2010.  These percentages will decline over time.

As of January 1, 2008, Ford began paying interest supplements and residual value support to us at the time we purchase eligible contracts from dealers.  The amount of unearned interest supplements for finance receivables was $1.9 billion at December 31, 2010 and at December 31, 2009 included in Finance receivables, net.  The amount of unearned interest supplements and residual support payments for net investment in operating leases was $863 million at December 31, 2010, compared with $1.1 billion at December 31, 2009 included in Other liabilities and deferred income.
 
 
20

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
At December 31, 2010, in the United States and Canada, Ford is obligated to pay us about $269 million of interest supplements and $26 million of residual value support payments over the terms of the related finance contracts and operating leases, compared with about $1 billion of interest supplements and about $180 million of residual value support at December 31, 2009, in each case for contracts purchased prior to January 1, 2008.  The unpaid interest supplements and residual value support payment obligations on these contracts will continue to decline as the contracts liquidate.  For additional information on our finance receivables and net investment in operating leases, see Notes 3, 4, and 18 of our Notes to the Financial Statements.

Credit Risk

Credit risk is the possibility of loss from a customer’s or dealer’s 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 (retail installment and lease) and non-consumer (wholesale and dealer loan) segments to balance our level of risk and return.  The allowance for credit losses included on our balance sheet is our estimate of the probable credit losses inherent in receivables and leases at the date of our balance sheet.  Consistent with our normal practices and policies, we assess the adequacy of our allowance for credit losses quarterly and regularly evaluate the assumptions and models used in establishing the allowance.

In purchasing retail finance and lease contracts, we use a proprietary scoring system that classifies contracts using several factors, such as credit bureau information, credit bureau scores (e.g., FICO score), customer characteristics, and contract characteristics.  In addition to our proprietary scoring system, we consider other factors, such as employment history, financial stability, and capacity to pay.  As of December 31, 2010, about 5% of the outstanding U.S. retail finance and lease contracts in our serviced portfolio were classified as high risk at contract inception, about the same as year-end 2009.  For additional information on the quality of our receivables, see Note 3 of our Notes to the Financial Statements.

 
21

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Credit Loss Metrics

Worldwide

The following table shows worldwide charge-offs (credit losses, net of recoveries) for the various categories of financing during the periods indicated.  The loss-to-receivables ratios, which equal charge-offs on an annualized basis divided by the average amount of receivables outstanding for the period, excluding the allowance for credit losses and unearned interest supplements related to finance receivables, are shown below.

   
Full Year
 
   
2010
   
2009
   
2008
 
   
(in millions)
 
Charge-offs – On-Balance Sheet
                 
     Retail installment and lease
  $ 416     $ 989     $ 1,089  
     Wholesale
    (5 )     94       29  
     Dealer loan and other
    4       12       17  
          Total charge-offs – on-balance sheet
  $ 415     $ 1,095     $ 1,135  
                         
Loss-to-Receivables Ratios – On-Balance Sheet
                       
     Retail installment and lease
    0.65 %     1.25 %     1.10 %
     Wholesale
    (0.03 )     0.45       0.09  
          Total loss-to-receivables ratio (including dealer loan and other) – on-balance sheet
    0.47 %     1.07 %     0.84 %
                         
Memo:
                       
     Total charge-offs – managed (in millions)
  $ 415     $ 1,100     $ 1,166  
          Total loss-to-receivables ratio (including dealer loan and other) – managed
    0.47 %     1.07 %     0.84 %

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, the auction price of repossessed vehicles, and other charge-offs.  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.
 
In 2010 charge-offs and loss-to-receivables ratios decreased from a year ago primarily reflecting lower losses in the United States and Europe.  Charge-offs in the United States decreased due to lower repossessions, lower severity and lower wholesale and dealer loan net losses.  Charge-offs in Europe decreased primarily reflecting lower losses in Germany and Spain.  For additional information on severity, refer to the “Critical Accounting Estimates — Allowance for Credit Losses” section of Item 7 of Part II of our 10-K Report.
 
 
22

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

U.S. Ford, Lincoln and Mercury Brand Retail Installment and Operating Lease

The following table shows the credit loss metrics for our Ford, Lincoln and Mercury brand U.S. retail installment sale and operating lease portfolio.  This portfolio was 69% of our worldwide on-balance sheet portfolio of retail installment receivables and net investment in operating leases at December 31, 2010.  Trends and causal factors are consistent with the worldwide results, with repossessions down 30,000 units in 2010 from a year ago, reflecting improved portfolio performance, fewer accounts outstanding and the improved economic environment.  Severity was lower by $1,400 per unit from a year ago, mainly due to improvements in auction values in the used vehicle market.

   
Full Year
 
 
 
2010
   
2009
   
2008
 
On-Balance Sheet
                 
Charge-offs (in millions)
  $ 280     $ 635     $ 775  
Loss-to-receivables ratio
    0.68 %     1.32 %     1.36 %
                         
Other Metrics — Serviced
                       
Repossessions (in thousands)
    64       94       81  
Repossession ratio (a)
    2.41 %     3.01 %     2.30 %
Severity (b)
  $ 6,900     $ 8,300     $ 9,900  
New bankruptcy filings (in thousands)
    42       47       37  
Over-60 day delinquency ratio (c)
    0.15 %     0.24 %     0.24 %
                         
Memo:
                       
Charge-offs – managed (in millions)
  $ 280     $ 637     $ 796  
Loss-to-receivables ratio – managed
    0.68 %     1.32 %     1.35 %
 
(a)
Repossessions as a percent of the average number of accounts outstanding during the periods.
(b)
Average loss per disposed repossession.
(c)
Delinquencies are expressed as a percent of the accounts outstanding for non-bankrupt accounts.
 
Allowance for Credit Losses

Our allowance for credit losses and our allowance for credit losses as a percentage of end-of-period receivables (finance receivables, excluding unearned interest supplements, and net investment in operating leases, excluding the allowance for credit losses) for our on-balance sheet portfolio are shown below.  A description of our allowance setting process is provided in the “Critical Accounting Estimates — Allowance for Credit Losses” section of Item 7 of Part II of our 10-K Report.

   
December 31,
 
   
2010
   
2009
   
2008
 
   
(in millions)
 
Allowance for Credit Losses
                 
Retail installment and lease
  $ 788     $ 1,479     $ 1,610  
Wholesale
    48       43       55  
Dealer loan and other
    18       27       3  
Total allowance for credit losses
  $ 854     $ 1,549     $ 1,668  
                         
As a Percentage of End-of-Period Receivables
                       
Retail installment and lease
    1.32 %     2.08 %     1.82 %
Wholesale
    0.22       0.19       0.20  
Total including dealer loan and other
    1.02 %     1.61 %     1.40 %

The allowance for credit losses is estimated using a combination of models and management judgment, and is based on such factors as portfolio quality, historical loss performance, and receivable levels.  Our allowance for credit losses decreased from 2009, primarily reflecting the decrease in charge-offs and decline in receivables.  At December 31, 2010, our allowance for credit losses included about $9 million for management’s judgment regarding higher retail loss assumptions in Spain compared with historical trends used in our models.  At December 31, 2009, our allowance for credit losses included about $215 million, which was based on management’s judgment regarding higher retail installment and lease repossession assumptions and higher wholesale and dealer loan default assumptions compared with historical trends used in our models.  At December 31, 2008, our allowance for credit losses included about $210 million, which was based on management’s judgment regarding higher severity assumptions.  The credit quality of our retail and lease originations remains high.

 
23

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Residual Risk

We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us.  Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle.  We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data.

For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates — Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 10-K Report.

North America Retail Operating Lease Experience

We use various statistics to monitor our residual risk:

 
·
Placement volume measures the number of leases we purchase in a given period;
 
·
Termination volume measures the number of vehicles for which the lease has ended in the given period; and
 
·
Return volume reflects the number of vehicles returned to us by customers at lease-end.

The following table shows operating lease placement, termination, and return volumes for our North America Segment, which accounted for 97% of our total investment in operating leases at December 31, 2010:

   
Full Year
 
   
2010
   
2009
   
2008
 
   
(in thousands)
 
Placements
    120       67       317  
Terminations
    408       386       381  
Returns
    281       314       327  
                         
Memo:
                       
Return rates
    69 %     81 %     86 %

In 2010, placement volumes were up 53,000 units compared with 2009, primarily reflecting higher industry sales, higher Ford market share and changes in Ford’s marketing programs.  Termination volumes increased by 22,000 units compared with last year, reflecting higher placement volumes in 2007.  Return volumes decreased 33,000 units compared with last year, primarily reflecting lower return rates, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase.

 
24

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
U.S. Ford, Lincoln and Mercury Brand Retail Operating Lease Experience

The following table shows return volumes for our Ford, Lincoln and Mercury brand U.S. operating lease portfolio.  Also included are auction values at constant fourth quarter 2010 vehicle mix for lease terms comprising 59% of our active Ford, Lincoln and Mercury brand U.S. operating lease portfolio:

   
Full Year
 
   
2010
   
2009
   
2008
 
   
(in thousands)
 
Returns                   
24-Month term
    39       60       88  
36-Month term
    71       65       61  
39-Month/Other term
    49       34       19  
Total returns
    159       159       168  
                         
Memo:
                       
Return rates
    65 %     78 %     88 %
                         
Auction Values at Constant Fourth Quarter 2010 Vehicle Mix
                       
24-Month term
  $ 19,120     $ 18,225     $ 16,645  
36-Month term
    15,510       14,145       13,180  

In 2010, Ford, Lincoln and Mercury brand U.S. return volumes were equal to 2009, primarily reflecting a lower return rate, down thirteen percentage points to 65%, consistent with improved auction values relative to our expectations of lease-end values at the time of contract purchase offset by higher termination volume.  Auction values at constant fourth quarter 2010 mix were up $895 per unit from 2009 levels for vehicles under 24-month leases, and up $1,365 for vehicles under 36-month leases, primarily reflecting the overall auction value improvement in the used vehicle market.

Recent lease placement trends will result in a much lower mix of 24-month contracts within Ford Credit’s return volume over the next several quarters.  Scheduled termination volume for vehicles under 24-month contracts is near zero for all of 2011, but the mix of 24-month contracts is expected to increase in 2012 to the level seen in 2010.
 
 
25

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Credit Ratings

Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the SEC:

 
·
DBRS Limited (“DBRS”);
 
·
Fitch, Inc. (“Fitch”);
 
·
Moody’s Investors Service, Inc. (“Moody’s”); and
 
·
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”).

In several markets, locally recognized rating agencies also rate us.  A credit rating reflects an assessment by the rating agency of the credit risk associated with 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.  Credit ratings assigned to us from all of the NRSROs are closely associated with their opinions on Ford.

The following chart summarizes changes in long-term senior unsecured credit ratings, short-term credit ratings, and the outlook assigned to us since January 2008 by these four NRSROs:

NRSRO RATINGS
 
DBRS
Fitch
Moody’s
S&P
Date
Long-
Term
Short-
Term
Trend
Long-
Term
Short-
Term
Outlook
Long-
Term
Short-
Term
Outlook
Long-
Term
Short-
Term
Outlook
Jan. 2008
B
R-4
Stable
BB-
B
Negative
B1
NP
Stable
B
B-3
Stable
June 2008
B
R-4
Negative
BB-
B
Negative
B1
NP
Negative
B
B-3
Negative
July 2008
B
R-4
Negative
BB-
B
Negative
B1
NP
Negative
B-
NR
Negative
Aug. 2008
B
R-4
Negative
B+
B
Negative
B1
NP
Negative
B-
NR
Negative
Oct. 2008
B
R-4
Negative
B-
C
Negative
B2
NP
Negative
B-
NR
Negative
Nov. 2008
B (low)
R-5
Negative
B-
C
Negative
B3
NP
Negative
CCC+
NR
Negative
Dec. 2008
B (low)
R-5
Negative
B-
C
Negative
Caa1
NP
Negative
CCC+
NR
Negative
July 2009
B (low)
R-5
Negative
B-
C
Negative
Caa1
NP
Negative
CCC+
NR
Developing
Aug. 2009
B (low)
R-5
Stable
B
C
Stable
Caa1
NP
Negative
CCC+
NR
Developing
Sep. 2009
B (low)
R-5
Stable
B
C
Stable
Caa1
NP
Review
CCC+
NR
Developing
Nov. 2009
B (low)
R-5
Positive
B
C
Positive
B3
NP
Review
B-
NR
Stable
Dec. 2009
B
R-5
Stable
B
C
Positive
B3
NP
Review
B-
NR
Stable
Jan. 2010
B
R-5
Stable
B+
B
Positive
B3
NP
Review
B-
NR
Stable
Mar. 2010
B (high)
R-4
Positive
B+
B
Positive
B1
NP
Review
B-
NR
Stable
Apr. 2010
B (high)
R-4
Positive
BB-
B
Positive
B1
NP
Review
B-
NR
Positive
May 2010
B (high)
R-4
Positive
BB-
B
Positive
Ba3
NP
Stable
B-
NR
Positive
Aug. 2010
BB
R-4
Stable
BB-
B
Stable
Ba3
NP
Stable
B+
NR
Positive
Oct. 2010
BB
R-4
Stable
BB-
B
Stable
Ba2
NP
Stable
B+
NR
Positive
Jan. 2011
BB
R-4
Stable
BB-
B
Positive
Ba2
NP
Positive
B+
NR
Positive
Feb. 2011
BB
R-4
Stable
BB-
B
Positive
Ba2
NP
Positive
BB-*
NR
Positive
 
*
S&P assigns FCE a long-term senior unsecured credit rating of BB, maintaining a one notch differential versus Ford Credit.
 
 
26

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Funding

Overview

Our funding strategy is to have sufficient liquidity to enable us to profitably support Ford, its dealers and customers in all economic environments.  We maintain a substantial cash balance, committed funding capacity and access to diverse funding sources and we also manage interest rate and currency risks.  Our credit ratings improved in 2010 though we remain below investment grade levels.  As a result, securitization continues to represent a substantial portion of our funding mix as this market remains more cost effective than unsecured funding and allows us access to a wider investor base.  We expect our unsecured funding mix to increase as we are able to source term funding from the unsecured markets on increasingly favorable terms.  In addition, we have various alternative business arrangements for select products and markets that reduce our funding requirements while allowing us to support Ford (e.g., our partnering in Brazil for retail financing and FCE’s partnering with various institutions in Europe for full service leasing and retail and wholesale financing).  We also have an application pending for Federal Deposit Insurance Corporation (“FDIC”) and State of Utah approval for an industrial loan corporation (“ILC”) that could provide a limited source of funding.  Additionally, in the second quarter of 2010, we published notice of our intent to apply for a bank charter in Canada.

In 2010, we completed about $19 billion of public and private securitization funding in the United States, Canada and Europe across all asset classes, including $2 billion in the fourth quarter.  We also completed about $6 billion of unsecured funding globally, including $1 billion in the fourth quarter.  We extended the term of our funding by issuing unsecured debt at longer tenors and selling longer term subordinate notes of our securitization transactions.  Our credit spreads improved significantly compared to 2009 levels reflecting improved credit profiles of Ford and Ford Credit, strong investor demand for our debt transactions and supportive markets.

At December 31, 2010, we had committed capacity totaling $34.3 billion, about equal to 2009 year-end levels.  About 69% of our committed capacity, as of December 31, 2010, is up for renewal in 2011.  Our renewal strategy is to protect our global funding needs, optimize capacity utilization and maintain sufficient liquidity.  Most of our asset-backed committed facilities enable us to obtain term funding up to the time that the facilities mature.  Any outstanding debt at the maturity of the facilities remains outstanding and is repaid as underlying assets liquidate.  Our ability to obtain funding under our committed asset-backed liquidity programs is subject to having a sufficient amount of assets eligible for these programs, and for certain programs, having the ability to obtain derivatives to manage the interest rate risk.  For additional information on our committed capacity programs, refer to the “Liquidity” section of Item 7 of Part II of our 10-K Report

Our funding plan is subject to risks and uncertainties, many of which are beyond our control, including disruption in the capital markets for the types of asset-backed securities used in our asset-backed funding and the effects of regulatory reform efforts on the financial markets.  Potential impacts of industry events and regulation on our ability to access debt and derivatives markets, or renew our committed liquidity programs in sufficient amounts and at competitive rates, represents another risk to our funding plan.  As a result of such events or regulation, we may need to reduce new originations thereby reducing our ongoing profits and adversely affecting our ability to support the sale of Ford vehicles.
 
 
27

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Funding Sources
 
Our funding sources include primarily securitization transactions (including other structured financings) and unsecured debt.  We issue both short- and long-term debt that is held by both institutional and retail investors, with long-term debt having an original maturity of more than 12 months.

We sponsor a number of securitization programs that can be structured to provide both short- and long-term funding through institutional investors in the United States and international capital markets.  For additional information on our securitization transactions, refer to the “Securitization Transactions” section of Item 7 of Part II of our 10-K Report.

We obtain short-term unsecured funding from the sale of floating rate demand notes under our Ford Interest Advantage program and by issuing unsecured commercial paper in the United States, Europe, Mexico, and other international markets.  At December 31, 2010, the principal amount outstanding of Ford Interest Advantage notes, which may be redeemed at any time at the option of the holders thereof without restriction, was $4.5 billion.  At present, all of our short-term credit ratings by NRSROs are below the Tier-2 category, and as a result we have limited access to the unsecured commercial paper market and our unsecured commercial paper cannot be held by money market funds.  At December 31, 2010, the principal amount outstanding of our unsecured commercial paper was about $80 million which represents issuance under our commercial paper program in Mexico.

We do not hold reserves specifically to fund the payment of any of our unsecured short-term funding obligations.  Instead, we maintain multiple sources of liquidity, including cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities), unused committed liquidity programs, excess securitizable assets, and committed and uncommitted credit facilities, which should be sufficient for our unsecured short-term funding obligations.

U.S. Financial Industry Regulations

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was enacted July 21, 2010 to reform practices in the financial services industries, including automotive financing and securitization of automotive finance receivables.  Since its enactment, the Act has briefly interrupted the securitization market on several occasions.  Each time, temporary or indefinite regulatory clarifications have reopened the markets.  The Act is subject to significant rulemaking, and we cannot predict the impact of the Act and the resulting regulations on our business until such rulemaking is complete.  For additional information on how the Act may impact our business, refer to “Item 1A. Risk Factors”.

Government-Sponsored Securitization Funding Programs

U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”).  TALF began in March 2009 to make credit available by restoring liquidity in the asset-backed securitization market.  TALF expired in March 2010.  At December 31, 2010, the outstanding balance of our asset-backed securities that were TALF-eligible at issuance was $7.7 billion, compared with $8.1 billion at December 31, 2009 reflecting issuance of $2.3 billion in the first quarter of 2010 more than offset by amortization of about $2.7 billion in 2010.  The outstanding balance of our asset-backed securities that were TALF-eligible at issuance will decline to zero over time as the debt continues to amortize and no new securities are issued.
 
European Central Bank (“ECB”) Open Market Operations.  FCE is eligible to access liquidity through the ECB’s open market operations program.  This program allows eligible counterparties to use eligible assets (including asset-backed securities) as collateral for short-term liquidity.  During 2010, FCE repaid all ECB funding relating to retained asset-backed securities with the majority of previously retained asset-backed securities now placed with traditional public term securitization investors.  FCE continues to obtain funding from the ECB under a longstanding credit claim program using certain of its German wholesale receivables as collateral.  At December 31, 2010, FCE had $67 million of funding from the ECB, down from $1.8 billion at December 31, 2009.

Cost of Funding Sources

The cost of securitization transactions and unsecured debt funding is based on a margin or spread over a benchmark interest rate.  Spreads are typically measured in basis points.  Our asset-backed funding and unsecured long-term debt costs are based on spreads over U.S. Treasury securities of similar maturities, a comparable London Interbank Offered Rate (“LIBOR”), or other comparable benchmark rates.  Our floating rate demand notes funding costs change depending on market conditions.

 
28

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In addition to enhancing our liquidity, one of the main reasons that securitization remains a primary funding source has been the cost advantage our securitization transactions offer over our unsecured long-term debt funding.  During 2010, our spreads on the three-year fixed rate notes offered in our U.S. public retail securitization transactions decreased from 92 to 25 basis points over the relevant benchmark rates.  During 2010, our U.S. unsecured long-term debt transaction spreads ranged from 414 to 444 basis points over the relevant benchmark rates, though spreads have tightened to 231 basis points for our 2011 issuance.

Funding Portfolio

Our outstanding debt and off-balance sheet securitization transactions were as follows on the dates indicated:

   
December 31,
 
   
2010
   
2009
   
2008
 
   
(in billions)
 
Debt
                 
Asset-backed commercial paper (a)(b)
  $ 6.6     $ 6.4     $ 11.5  
Other asset-backed short-term debt (a)
    1.2       4.5       5.6  
Ford Interest Advantage (c)
    4.5       3.6       2.0  
Unsecured commercial paper
    0.1       0.0       0.0  
Other short-term debt
    0.9       0.9       1.0  
Total short-term debt
    13.3       15.4       20.1  
Unsecured long-term debt (including notes payable within one year)
    33.8       38.9       51.2  
Asset-backed long-term debt (including notes payable within one year) (a)
    35.8       42.0       55.2  
Total debt
    82.9       96.3       126.5  
                         
Off-Balance Sheet Securitization Transactions
                       
Securitized off-balance sheet portfolio
          0.1       0.6  
Retained interest
          0.0       (0.1 )
Total off-balance sheet securitization transactions
          0.1       0.5  
Total debt plus off-balance sheet securitization transactions
  $ 82.9     $ 96.4     $ 127.0  
                         
Ratios
                       
Securitized funding to managed receivables
    52 %     56 %     62 %
Short-term debt and notes payable within one year to total debt
    47       43       50  
Short-term debt and notes payable within one year to total capitalization
    42       39       46  
 
(a)
Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements. 
(b)
At December 31, 2010 and 2009, we did not have any asset-backed commercial paper sold to the the U.S. government-sponsored Commercial Paper Funding Facility  ("CPFF").  At December 31, 2008, includes asset-backed commercial paper sold to the CPFF of $7 billion. 
(c)
The Ford Interest Advantage program consists of our floating rate demand notes.
 
At December 31, 2010, unsecured long-term debt (including notes payable within one year) was down about $5 billion from year-end 2009, primarily reflecting about $11 billion of debt maturities, repurchases, and calls, offset partially by about $6 billion of new unsecured long-term debt issuance.  Remaining unsecured long-term debt maturities are as follows: 2011 — $9 billion; 2012 — $7 billion; 2013 — $5 billion; and the remainder thereafter.

We are projecting 2011 year-end managed receivables in the range of $80 to $85 billion and securitized funding to represent about 53% to 57% of total managed receivables.  It is our expectation that this percentage will decrease over time reflecting our ability to obtain term funding from the unsecured markets on increasingly favorable terms.

At December 31, 2010, asset-backed long-term debt (including notes payable within one year) was down about $6 billion from year-end 2009, reflecting asset-backed long-term debt amortization in excess of issuance.

 
29

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Term Funding Plan

The following table shows our public and private term funding issuances in 2009 and 2010 and our planned issuances for 2011:

   
2011
             
   
Forecast
   
2010
   
2009
 
   
(in billions)
 
Public Term Funding
                 
Unsecured
  $  6   –    8     $ 6     $ 5  
Securitization Transactions
    12   –    6       11       15  
Total public term funding
  $   19   –  24     $ 17     $ 20  
                         
Private Term Funding*
  $   4   –    8     $ 8     $ 11  
                         
 
* Includes private term debt, securitization transactions, and other term funding; excludes sales to Ford Credit’s on-balance sheet asset-backed commercial paper program. 
 
In 2010, we completed about $17 billion of public term funding transactions, including: about $5 billion of retail asset-backed securitization transactions; about $3 billion of wholesale asset-backed securitization transactions; about $3 billion of lease asset-backed securitization transactions; and about $6 billion of unsecured issuances.   We also completed about $8 billion of private term funding transactions (excluding our on-balance sheet asset-backed commercial paper program) primarily reflecting securitization transactions across all regions and asset classes.

Through February 24, 2011, we completed about $3 billion of public term funding transactions, including about $2 billion for retail and wholesale asset-backed securitization transactions in the United States and $1 billion of unsecured issuance in the United States.  We also completed about $2 billion of private term funding transactions, primarily reflecting retail, lease, and wholesale asset-backed transactions in the United States, Europe, and Mexico.

 
30

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Liquidity

We define liquidity as cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) and capacity (which includes capacity in our committed liquidity programs, our FCAR Owner Trust retail securitization program (“FCAR”), and credit facilities), less asset-backed capacity in excess of eligible receivables and cash and cash equivalents required to support on-balance sheet securitization transactions.  We have multiple sources of liquidity, including committed asset-backed funding capacity.

   
December 31,
 
   
2010
   
2009
   
2008
 
   
(in billions)
 
       
Cash, cash equivalents, and marketable securities*
  $ 14.6     $ 17.3     $ 23.6  
                         
Committed liquidity programs
  $ 24.2     $ 23.2     $ 28.0  
Asset-backed commercial paper FCAR
    9.0       9.3       15.7  
Credit facilities
    1.1       1.3       2.0  
    Committed capacity
  $ 34.3     $ 33.8     $ 45.7  
        Committed capacity and cash
  $ 48.9     $ 51.1     $ 69.3  
Less: Capacity in excess of eligible receivables
    (6.3 )     (6.5 )     (4.8 )
Less: Cash and cash equivalents to support on-balance sheet securitization transactions
    (4.2 )     (5.2 )     (5.5 )
                Liquidity
  $ 38.4     $ 39.4     $ 59.0  
Less: Utilization
    (15.8 )     (18.3 )     (37.6 )
                Liquidity available for use
  $ 22.6     $ 21.1     $ 21.4  
                         
 
Excludes marketable securities related to insurance activities. 
 
At December 31, 2010, committed capacity and cash shown above totaled $48.9 billion, of which $38.4 billion could be utilized (after adjusting for capacity in excess of eligible receivables of $6.3 billion and cash required to support on-balance sheet securitization transactions of $4.2 billion).  At December 31, 2010, $15.8 billion was utilized, leaving $22.6 billion available for use (including $10.4 billion of cash, cash equivalents, and marketable securities, but excluding marketable securities related to insurance activities and cash and cash equivalents to support on-balance sheet securitization transactions).

At December 31, 2010, our liquidity available for use was higher than year-end 2009 by about $1.5 billion, reflecting cash payments for debt maturities, repurchases and calls, distributions, and tax payments that were lower than the liquidity generated from the impact of lower receivables, profits and new debt issuances.  Liquidity available for use was 27% of managed receivables.

In addition to the $22.6 billion of liquidity available for use, the $6.3 billion of capacity in excess of eligible receivables provides us with an alternative for funding future purchases or originations and gives us flexibility to shift capacity among markets and asset classes.

Cash, Cash Equivalents, and Marketable Securities.  At December 31, 2010, our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) totaled $14.6 billion, compared with $17.3 billion at year-end 2009.  In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs.  These excess amounts are maintained primarily as highly liquid investments, which provide liquidity for our short-term funding needs and give us flexibility in the use of our other funding programs.  Our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) primarily include U.S. Treasury obligations, federal agency securities, bank time deposits with investment grade institutions, corporate investment-grade securities, A-1/P-1 (or higher) rated commercial paper, debt obligations of certain foreign governments, foreign government agencies and supranational institutions, and money market funds that invest primarily in federal agency securities, U.S. Treasury bills, and other short-term investment grade securities.  The average maturity of these investments ranges from 90 days to up to one-year and is adjusted based on market conditions and liquidity needs.  We monitor our cash levels and average maturity on a daily basis.  Cash, cash equivalents, and marketable securities include amounts to be used only to support our on-balance sheet securitization transactions of $4.2 billion at December 31, 2010 and $5.2 billion at December 31, 2009.

 
31

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Our substantial liquidity and cash balance have provided the opportunity to selectively repurchase and call our unsecured debt on the open market.  In 2010, we repurchased about $2.9 billion and called about $2.1 billion of our unsecured debt maturities.

Committed Liquidity Programs.  We and our subsidiaries, including FCE, have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits (“conduits”) and other financial institutions.  Such counterparties are contractually committed, at our option, to purchase from us eligible retail or wholesale assets or to purchase or make advances under asset-backed securities backed by retail, lease, or wholesale assets for proceeds of up to $24.2 billion at December 31, 2010 ($12.5 billion retail, $9.4 billion wholesale, and $2.3 billion lease assets) of which about $7.5 billion are commitments to FCE.  These committed liquidity programs have varying maturity dates, with $18.4 billion having maturities within the next twelve months (of which $3 billion relates to FCE commitments), and the remaining balance having maturities between March 2012 and May 2015.  We plan to achieve capacity renewals to protect our global funding needs, optimize capacity utilization and maintain sufficient liquidity.

Our ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain interest rate hedging arrangements for certain securitization transactions.  Our capacity in excess of eligible receivables protects us against the risk of lower than planned renewal rates.  At December 31, 2010, $8.6 billion of these commitments were in use.  These programs are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements), and generally, credit rating triggers that could limit our ability to obtain funding.  However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels.  Based on our experience and knowledge as servicer of the related assets, we do not expect any of these programs to be terminated due to such events.  For additional information on our committed liquidity programs, see Note 9 of our Notes to the Financial Statements.

Credit Facilities

Our credit facilities and asset-backed commercial paper lines were as follows on the dates indicated:

   
December 31,
 
   
2010
   
2009
   
2008
 
   
(in billions)
 
Credit Facilities
                 
Ford Credit bank lines
  $ 0.0     $ 0.0     $ 0.3  
FCE bank lines
    1.1       1.3       1.7  
Utilized amounts
    (0.5 )     (0.7 )     (0.6 )
Available credit facilities
  $ 0.6     $ 0.6     $ 1.4  
                         
Asset-Backed Commercial Paper Lines
                       
FCAR asset-backed commercial paper lines
  $ 9.0     $ 9.3     $ 15.7  

At December 31, 2010, we and our majority owned subsidiaries, including FCE, had $1.1 billion of contractually committed unsecured credit facilities with financial institutions.  We had $568 million available for use, of which $510 million expire in 2011 and $58 million expire in 2012.  Almost all of our contractually committed unsecured credit facilities are FCE worldwide credit facilities and may be used, at FCE’s option, by any of FCE’s direct or indirect, majority-owned subsidiaries.  FCE will guarantee any such borrowings.  All of the worldwide credit facilities are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements), and credit rating triggers that could limit our ability to obtain funding.

In addition, at December 31, 2010, we had about $9 billion of contractually committed liquidity facilities provided by banks to support our FCAR program, of which $4.3 billion expire in 2011, $348 million expire in 2012, and $4.4 billion expire in 2013.  Utilization of these facilities is subject to conditions specific to the FCAR program and our having a sufficient amount of eligible retail assets for securitization.  The FCAR program must be supported by liquidity facilities equal to at least 100% of its outstanding balance.  At December 31, 2010, about $9 billion of FCAR’s bank liquidity facilities were available to support FCAR’s asset-backed commercial paper, subordinated debt, or FCAR’s purchase of our asset-backed securities.  At December 31, 2010, the outstanding commercial paper balance for the FCAR program was $6.7 billion.

 
32

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Balance Sheet Liquidity Profile

We define our balance sheet liquidity profile as the cumulative maturities of our finance receivables, investment in operating leases, and cash less the cumulative debt maturities over upcoming annual periods.  The following table shows our balance sheet liquidity profile for the periods presented as of December 31, 2010:

   
Cumulative Maturities
 
   
Through
2011
   
Through
2012
   
Through
2013
   
Through
2014 and
Beyond
 
   
(in billions)
 
Finance receivables (a), investment in operating leases (b) and cash (c)
  $ 63.6     $ 80.5     $ 89.8     $ 97.1  
Debt
    (47.4 )     (60.8 )     (69.1 )     (83.0 )
Finance receivables, investment in operating leases and cash over/(under) debt
  $ 16.2     $ 19.7     $ 20.7     $ 14.1  
 
(a)  Finance receivables net of unearned income. 
(b)  Investment in operating leases net of accumulated depreciation. 
(c) Cash includes cash, cash equivalents, and marketable securities (excludes marketable securities related to insurance activities) at December 31, 2010. 
 
Our balance sheet is inherently liquid because of the short-term nature of our finance receivables, investment in operating leases, and cash.  Maturities of investment in operating leases consist primarily of rental payments attributable to depreciation over the remaining life of the lease and the expected residual value at lease termination.  For additional information on maturities of finance receivables and debt, see Notes 3 and 9 of our Notes to the Financial Statements.  The 2011 finance receivables maturities in the table above include all of the wholesale receivables maturities that are otherwise shown in Note 3 as extending beyond 2011 and also include expected prepayments for our retail installment sale contracts and investment in operating leases.  The table above also reflects the following adjustments to debt maturities in Note 9 to match all of the asset-backed debt maturities with the underlying asset maturities:

 
·
The 2011 maturities include all of the wholesale securitization transactions that otherwise extend beyond 2011; and
 
·
Retail securitization transactions under certain committed liquidity programs are treated as amortizing on January 1, 2011 instead of amortizing after the contractual maturity of those committed liquidity programs that otherwise extend beyond January 1, 2011.

Liquidity Risks

Despite our diverse sources of liquidity, our ability to maintain this liquidity may be affected by the following factors (not necessarily listed in order of importance or probability of occurrence):

 
·
Prolonged disruption of the debt and securitization markets;
 
·
Global capital market volatility;
 
·
Market capacity for Ford- and Ford Credit-sponsored investments;
 
·
General demand for the type of securities we offer;
 
·
Our ability to continue funding through asset-backed financing structures;
 
·
Performance of the underlying assets within our asset-backed financing structures;
 
·
Inability to obtain hedging instruments;
 
·
Accounting and regulatory changes;
 
·
Our ability to maintain credit facilities and renew committed liquidity programs; and
 
·
Credit ratings assigned to us.
 
 
33

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Securitization Transactions

Overview

We securitize finance receivables and net investment in operating leases through a variety of programs, utilizing amortizing, variable funding, and revolving structures.  We also sell finance receivables in structured financing transactions.  Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions.  Our securitization programs are targeted to many different investors in both public and private transactions in capital markets worldwide.  We completed our first securitization transaction in 1988, and regularly securitize assets, purchased or originated, in the United States, Canada, Mexico, and European countries.

All of our securitization transactions involve sales to consolidated entities or we maintain control over the assets, and, therefore, the securitized assets and related debt remain on our balance sheet.  All of our securitization transactions since the first quarter of 2007 have been on-balance sheet transactions.  Both on- and off-balance sheet securitization transactions have an effect on our financial condition, operating results, and liquidity.

We securitize our assets because the securitization market provides us with a lower cost source of funding compared with unsecured debt given our present credit ratings, and it diversifies our funding among different markets and investors.  In the United States, we are generally able to obtain funding in two days for our unutilized capacity in most of our committed liquidity programs.  New programs and new transaction structures typically require substantial development time before coming to market.

Use of Special Purpose Entities

In a securitization transaction, the securitized assets are generally held by a bankruptcy-remote special purpose entity (“SPE”) in order to isolate the securitized assets from the claims of our other creditors and ensure that the cash flows on the securitized assets are available for the benefit of securitization investors.  As a result, payments to securitization investors are based on the creditworthiness of the securitized assets and any enhancements, and not on our creditworthiness.  Senior asset-backed securities issued by the SPEs generally receive the highest short-term credit ratings and among the highest long-term credit ratings from the rating agencies that rate them.

Securitization SPEs have limited purposes and generally are only permitted to purchase the securitized assets, issue asset-backed securities, and make payments on the securities.  Some SPEs, such as certain trusts that issue securities backed by retail installment sale contracts, only issue a single series of securities and generally are dissolved when those securities have been paid in full.  Other SPEs, such as the trusts that issue securities backed by wholesale receivables, issue multiple series of securities from time to time and are not dissolved until the last series of securities is paid in full.

Our use of SPEs in our securitization transactions is consistent with conventional practices in the securitization industry.  We sponsor the SPEs used in all of our securitization programs with the exception of bank-sponsored conduits.  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 Shares or shares of any of our affiliates.

Selection of Assets, Enhancements, and Retained Interests

In order to be eligible for inclusion in a securitization transaction, each asset must satisfy certain eligibility criteria designed for the specific transaction.  For example, for securitization transactions of retail installment sale contracts, the selection criteria may be based on factors such as location of the obligor, contract term, payment schedule, interest rate, financing program, the type of financed vehicle, and whether the contracts are active and in good standing (e.g., when the obligor is not more than 30-days delinquent or bankrupt).  Generally, we select the assets to be included in a particular securitization randomly from our entire portfolio of assets that satisfy the applicable eligibility criteria.

We provide various forms of credit enhancements to reduce the risk of loss for securitization investors.  Credit enhancements include over-collateralization (when the principal amount of the securitized assets exceeds the principal amount of related asset-backed securities), segregated cash reserve funds, subordinated securities, and excess spread (when interest collections on the securitized assets exceed the related fees and expenses, including interest payments on the related asset-backed securities).  We may also provide payment enhancements that increase the likelihood of the timely payment of interest and the payment of principal at maturity.  Payment enhancements include yield supplement arrangements, interest rate swaps and other hedging arrangements, liquidity facilities, and certain cash deposits.
 
 
34

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
We retain interests in our securitization transactions, including senior and subordinated securities issued by the SPE, rights to cash held for the benefit of the securitization investors (for example, a reserve fund), and residual interests.  Residual interests represent the right to receive collections on the securitized assets in excess of amounts needed to pay securitization investors and to pay other transaction participants and expenses.  We retain credit risk in securitization transactions because our retained interests include the most subordinated interests in the securitized assets and are structured to absorb expected credit losses on the securitized assets before any losses would be experienced by investors.  Based on past experience, we expect that any losses in the pool of securitized assets would likely be limited to our retained interests.

Our Continuing Obligations

We are engaged as servicer to collect and service the securitized assets.  Our servicing duties include collecting payments on the securitized assets and preparing monthly investor reports on the performance of the securitized assets and on amounts of interest and/or principal payments to be made to investors.  While servicing securitized assets, we apply the same servicing policies and procedures that we apply to our owned assets and maintain our normal relationship with our financing customers.

We generally have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default.  Securitization investors have no recourse to us or our other assets for credit losses on the securitized assets and have no right to require us to repurchase their investments.  We do not guarantee any asset-backed securities and have no obligation to provide liquidity or make monetary contributions or contributions of additional assets to our SPEs either due to the performance of the securitized assets or the credit rating of our short-term or long-term debt.  However, as the seller and servicer of the securitized assets, we are obligated to provide certain kinds of support to our securitization transactions, which are customary in the securitization industry.  These obligations include indemnifications, repurchase obligations on assets that do not meet eligibility criteria or that have been materially modified, the mandatory sale of additional assets in revolving transactions, and, in some cases, servicer advances of certain amounts.

Risks to Continued Funding under Securitization Programs

The following securitization programs contain structural features that could prevent us from using these sources of funding in certain circumstances:

 
·
Retail Securitization – If the credit enhancement on any asset-backed security held by FCAR is reduced to zero, FCAR may not purchase any additional asset-backed securities or issue additional commercial paper and would wind down its operations.  In addition, if credit losses or delinquencies in our portfolio of retail assets exceed specified levels, FCAR is not permitted to purchase additional asset-backed securities for so long as such levels are exceeded.
 
·
Retail Conduits – If credit losses or delinquencies on the pool of assets held by a conduit exceed specified levels, or if the level of over-collateralization or credit enhancements for such pool decreases below a specified level, we will not have the right to sell additional pools of assets to that conduit.
 
·
Wholesale Securitization – If the payment rates on wholesale receivables in the securitization trust are lower than specified levels or if there are significant dealer defaults, we will be unable to obtain additional funding and any existing funding would begin to amortize.
 
·
Retail Warehouse – If credit losses or delinquencies in our portfolio of retail assets exceed specified levels, we will be unable to obtain additional funding from the securitization of retail installment sale contracts through our retail warehouse facility  (i.e., a short-term credit facility under which draws are backed by the retail contracts).
 
·
Lease Warehouse – If credit losses or delinquencies in our portfolio of retail lease contracts exceed specified levels, we will be unable to obtain additional funding from the securitization of retail lease contracts through our lease warehouse facility  (i.e., a credit facility under which draws are backed by the retail lease contracts).

In the past, these features have not limited our ability to use securitization to fund our operations.

 
35

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In addition to the structural features discussed previously, our securitization programs may be affected by the following factors:

 
·
Market – Market disruption and volatility could impact investors’ acceptance of asset-backed securities and our ability to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts.  For additional information on market risk, refer to the “Market Risk” section of Item 7A of Part II of our 10-K Report.
 
·
Market capacity for us and our sponsored investments – Investors may reach exposure limits and/or wish to diversify away from our risk.
 
·
General demand for the type of assets supporting the asset-backed securities – Investor desire for securities with different risk and/or yield characteristics could result in reduced demand for these types of investments.
 
·
Availability of committed liquidity facilities – Our ability to maintain committed liquidity facilities for any programs that require them.
 
·
Amount and credit quality of assets available – Lower overall asset levels or a higher proportion of non-performing assets could decrease the amount of assets available to securitize.
 
·
Performance of assets in our previous securitization transactions – If assets in our existing securitization transactions deteriorate significantly, we may not be able to access the market, particularly in public transactions where asset performance is publicly available and/or the costs to securitize may increase.
 
·
Accounting and regulatory changes – Such changes may result in temporary disruption or termination of one or more of our present programs which may or may not be able to be restructured or replaced.
 
·
Credit ratings – Credit ratings assigned to us may impact investors’ acceptance of our asset-backed securities.
 
·
Bankruptcy of Ford, Ford Credit, or FCE – A bankruptcy of Ford, Ford Credit, or FCE would cause certain of our funding transactions to amortize and result in a termination of certain liquidity commitments.

If, as a result of any of these or other factors, the cost of securitization funding were to increase significantly or funding through securitization transactions were no longer available to us, it would have a material adverse impact on our financial condition and results of operations, which could adversely affect our ability to support the sale of Ford’s vehicles.
 
 
36

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
On-Balance Sheet Arrangements

All of our securitization transactions involve sales to consolidated entities or we maintain control over the assets and, therefore, the securitized assets and related debt remain in our financial statements.  We expect our future securitization transactions to continue to be on-balance sheet.  We believe on-balance sheet arrangements are more transparent to our investors.  Securitized assets are only available to repay the related asset-backed debt and to pay other securitization investors and other participants.  These underlying securitized assets are available only for payment of the debt and other obligations issued or arising in the securitization transactions; they are not available to pay our other obligations or the claims of our other creditors.  We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in each of these securitization transactions.  This debt is not our legal obligation or the legal obligation of our other subsidiaries.

The following table shows worldwide cash and cash equivalents, receivables, and related debt by segment and product for our on-balance sheet securitization transactions:

   
December 31,
 
   
2010
   
2009
 
   
Cash and
Cash
Equivalents
   
Finance
Receivables
and Net
Investment
in Operating
Leases (a)
   
Related
Debt
   
Cash and
Cash
Equivalents
   
Finance
Receivable
and Net
Investment
in Operating
Leases (a)
   
Related
Debt
 
   
(in billions)
 
Finance Receivables
                                   
    North America Segment
                                   
        Retail installment (b)
  $ 1.9     $ 28.7     $ 23.6     $ 2.0     $ 35.0     $ 28.3  
        Wholesale
    0.2       12.8       8.6       0.1       12.6       6.3  
            Total North America Segment
    2.1       41.5       32.2       2.1       47.6       34.6  
    International Segment
                                               
        Retail installment (b)
    1.0       7.1       5.2       1.4       9.9       7.4  
        Wholesale
    0.3       5.9       3.2       0.4       6.9       4.3  
            Total International Segment
    1.3       13.0       8.4       1.8       16.8       11.7  
                Total finance receivables
    3.4       54.5       40.6       3.9       64.4       46.3  
Net investment in operating leases
    0.8       6.2       3.0       1.3       10.4       6.6  
                 Total on-balance sheet arrangements
  $ 4.2     $ 60.7     $ 43.6     $ 5.2     $ 74.8     $ 52.9  
 
(a)  Before allowances for credit losses.  Unearned interest supplements are excluded from securitization transactions. 
(b)  Includes direct financing leases. 
 
For additional information on our on-balance sheet arrangements, see Note 6 of our Notes to the Financial Statements.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements (off-balance sheet securitization transactions and whole-loan sale transactions, excluding sales of businesses and liquidating portfolios) since the first quarter of 2007, which is consistent with our plan to execute on-balance sheet securitization transactions. For additional information on our off-balance sheet arrangements, see Note 6 of our Notes to the Financial Statements.

 
37

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Leverage

We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for retail, wholesale, and lease financing, and assessing our capital structure.  We refer to our shareholder’s interest as equity.  We calculate leverage on a financial statement basis and on a managed basis using the following formulas:
 

 
 
 
               
Financial
Statement
Leverage
=
Total Debt
Equity
               
 
                   
           
Retained
       
           
Interest in
       
       
Securitized
Off-balance
 
Securitized
Off-balance
 
Cash,
Cash Equivalents
 
Adjustments for
Derivative
   
Total Debt
+
Sheet
-
Sheet
-
and Marketable
-
Accounting
       
Receivables
 
Receivables
 
Securities (a)
 
on Total Debt (b)
Managed Leverage
=

             
Adjustments for
   
         
Equity
-
Derivative
Accounting
   
             
on Equity (b)
   
                   
 
(
a)
Excludes marketable securities related to insurance activities.
  (
b)
Primarily related to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.

The following table shows the calculation of our financial statement leverage (in billions, except for ratios):

   
December 31,
 
   
2010
   
2009
   
2008
 
                   
Total debt
  $ 82.9     $ 96.3     $ 126.5  
Equity
    10.3       11.0       10.6  
Financial statement leverage (to 1)
    8.0       8.8       12.0  

The following table shows the calculation of our managed leverage (in billions, except for ratios):

   
December 31,
 
   
2010
   
2009
   
2008
 
                   
Total debt
  $ 82.9     $ 96.3     $ 126.5  
Securitized off-balance sheet receivables outstanding
          0.1       0.6  
Retained interest in securitized off-balance sheet receivables
          0.0       (0.1 )
Adjustments for cash, cash equivalents, and marketable securities (a)
    (14.6 )     (17.3 )     (23.6 )
Adjustments for derivative accounting (b)
    (0.3 )     (0.2 )     (0.4 )
Total adjusted debt
  $ 68.0     $ 78.9     $ 103.0  
                         
Equity
  $ 10.3     $ 11.0     $ 10.6  
Adjustments for derivative accounting (b)
    (0.1 )     (0.2 )     (0.2 )
Total adjusted equity
  $ 10.2     $ 10.8     $ 10.4  
                         
Managed leverage (to 1)
    6.7       7.3       9.9  
 
(a)  Excludes marketable securities related to insurance activities. 
(b) Primarily related to market valuation adjustments to derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings. 
 
We believe that managed leverage is useful to our investors because it reflects the way we manage our business.  We retain interests in receivables sold in off-balance sheet securitization transactions and, with respect to subordinated retained interests, are exposed to credit risk.  Accordingly, we evaluate charge-offs, receivables, and leverage on a managed as well as a financial statement basis.  We also deduct cash and cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) because they generally correspond to excess debt beyond the amount required to support our operations and amounts to support on-balance sheet securitization transactions.  We make derivative accounting adjustments to our assets, debt, and equity positions to reflect the impact of interest rate instruments we use in connection with our term-debt issuances and securitization transactions.  The derivative accounting adjustments related to these instruments vary over the term of the underlying debt and securitized funding obligations based on changes in market interest rates.  We generally repay our debt obligations as they mature.  As a result, we exclude the impact of these derivative accounting adjustments on both the numerator and denominator in order to exclude the interim effects of changes in market interest rates.  For additional information on our use of interest rate instruments and other derivatives, refer to Item 7A of Part II of our 10-K Report.  We believe the managed leverage measure provides our investors with meaningful information regarding management’s decision-making processes.

 
38

 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
We plan our managed leverage by considering prevailing market conditions and the risk characteristics of our business.  At December 31, 2010, our managed leverage was 6.7 to 1, compared with 7.3 to 1 at December 31, 2009.  Based on our present analysis of the quality of our assets, we believe the appropriate leverage would be in the range of 10-11 to 1.  Longer term, we expect to return our leverage to the appropriate level consistent with our analysis of the quality of the assets.  Our managed leverage is significantly below the threshold of 11.5 to 1 set forth in the Amended and Restated Support Agreement with Ford.  In 2010, we paid $2.5 billion in cash distributions to our parent, Ford Holdings LLC.  For additional information on our planned distributions, refer to the “Outlook” section of Item 7 of Part II of our 10-K Report.

Aggregate Contractual Obligations

We are party to certain contractual obligations involving commitments to make payments to others.  Most of these are debt obligations, which are recorded on our balance sheet and disclosed in our Notes to the Financial Statements.  Long-term debt may have fixed or variable interest rates.  For long-term debt with variable rate interest, we estimate the future interest payments based on projected market interest rates for various floating rate benchmarks received from third parties.  In addition, we enter into contracts with suppliers for purchases of certain services, including operating lease commitments.  These arrangements may contain minimum levels of service requirements.  Our aggregate contractual obligations as of December 31, 2010 are shown below:

    Payments Due by Period  
   
Total
   
2011
      2012-2013       2014-2015    
2016 and
Thereafter
 
    (in millions)  
Long-term debt obligations*
  $ 69,705     $ 25,802     $ 28,244     $ 11,591     $ 4,068  
Interest payments relating to long-term debt
    9,034       3,026