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Management’s Discussion and Analysis of Financial Condition and Results of Operations<br />
Ford Credit retains interests in its securitization transactions, including primarily subordinated securities issued by the<br />
SPE, rights to cash held for the benefit of the securitization investors (for example, a reserve fund), and residual interests.<br />
Residual interests represent the right to receive collections on the securitized assets in excess of amounts needed to pay<br />
securitization investors and to pay other transaction participants and expenses. Ford Credit retains credit risk in<br />
securitization transactions because its retained interests include the most subordinated interests in the securitized assets<br />
and are structured to absorb expected credit losses on the securitized assets before any losses would be experienced by<br />
investors. Based on past experience, Ford Credit expects that any losses in the pool of securitized assets would likely be<br />
limited to its retained interests.<br />
Ford Credit is engaged as servicer to collect and service the securitized assets. Its servicing duties include collecting<br />
payments on the securitized assets and preparing monthly investor reports on the performance of the securitized assets<br />
and on amounts of interest and/or principal payments to be made to investors. While servicing securitized assets, Ford<br />
Credit applies the same servicing policies and procedures that Ford Credit applies to its owned assets and maintains its<br />
normal relationship with its financing customers.<br />
Ford Credit generally has no obligation to repurchase or replace any securitized asset that subsequently becomes<br />
delinquent in payment or otherwise is in default. Securitization investors have no recourse to Ford Credit or its other<br />
assets for credit losses on the securitized assets and have no right to require Ford Credit to repurchase the investments.<br />
Ford Credit does not guarantee any asset-backed securities, although it is the co-obligor of the debt of a consolidated VIE<br />
up to $250 million for two of its securitization transactions, and has no obligation to provide liquidity or make monetary<br />
contributions or contributions of additional assets to its SPEs either due to the performance of the securitized assets or<br />
the credit rating of its short-term or long-term debt. However, as the seller and servicer of the securitized assets, Ford<br />
Credit is obligated to provide certain kinds of support to its securitization transactions, which are customary in the<br />
securitization industry. These obligations include indemnifications, repurchase obligations on assets that do not meet<br />
representations or warranties on eligibility criteria or that have been materially modified, the mandatory sale of additional<br />
assets in revolving transactions, and, in some cases, servicer advances of certain amounts.<br />
Risks to Continued Funding under Securitization Programs. The following securitization programs contain structural<br />
features that could prevent Ford Credit from using these sources of funding in certain circumstances:<br />
• Retail Securitization. If the credit enhancement on any asset-backed security held by FCAR is reduced to zero,<br />
FCAR may not purchase any additional asset-backed securities or issue additional commercial paper and would<br />
wind down its operations. In addition, if credit losses or delinquencies in Ford Credit's portfolio of retail assets<br />
exceed specified levels, FCAR is not permitted to purchase additional asset-backed securities for so long as such<br />
levels are exceeded.<br />
• Retail Conduits. If credit losses or delinquencies on the pool of assets held by a conduit exceed specified levels,<br />
or if the level of over-collateralization or credit enhancements for such pool decreases below a specified level,<br />
Ford Credit will not have the right to sell additional pools of assets to that conduit.<br />
• Wholesale Securitization. If the payment rates on wholesale receivables in the securitization trust are lower than<br />
specified levels or if there are significant dealer defaults, Ford Credit will be unable to obtain additional funding<br />
and any existing funding would begin to amortize.<br />
• Lease Warehouse. If credit losses or delinquencies in Ford Credit's portfolio of retail lease contracts exceed<br />
specified levels, Ford Credit will be unable to obtain additional funding from the securitization of retail lease<br />
contracts through its lease warehouse facility (i.e., a credit facility under which draws are backed by the retail<br />
lease contracts).<br />
In the past, these features have not limited Ford Credit's ability to use securitization to fund its operations.<br />
In addition to the specific transaction-related structural features discussed above, Ford Credit's securitization<br />
programs may be affected by the following factors: market disruption and volatility, the market capacity for Ford Credit<br />
and Ford Credit's sponsored investments, the general demand for the type of assets supporting the asset-backed<br />
securities, the availability of committed liquidity facilities, the amount and credit quality of assets available, the<br />
performance of assets in its previous securitization transactions, accounting and regulatory changes, and Ford Credit's<br />
credit ratings. In addition, a bankruptcy of Ford, Ford Credit, or FCE would cause certain of Ford Credit's funding<br />
transactions to amortize and result in a termination of certain liquidity commitments. If, as a result of any of these or other<br />
factors, the cost of securitization funding were to increase significantly or funding through securitization transactions were<br />
no longer available to Ford Credit, it would have a material adverse impact on Ford Credit's financial condition and results<br />
of operations, which could adversely affect its ability to support the sale of Ford vehicles.<br />
66 Ford Motor Company | 2011 Annual Report