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Ford corporate bond rating


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Credit rating for a corporate bond issue of FORD

Credit rating for a corporate bond issue of FORD

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  • 1. Ford Credit Auto Owner Trust 2010-B A Credit Rating course Presentation Asian Institute of Management, Manila
  • 2. Agenda 1. Understand the structure of finance and collateral offered by the asset backed securities 2. Identify potential sources of risk 3. Specifically, focus on the nature of the collateral 4. Identify risks that may impede timely payment of principal and interest 5. Discuss and identify risks associated with the flow of cash
  • 3. Rating Criteria Credit ratings for ABSs are established by reviewing : • The structure of the deal and the parties involved • The nature and performance history of the collateral • The special purpose entity used to securitize the collateral and issue the resulting note • The credit enhancements used to protect the senior tranches against default.
  • 4. The Parties Involved: • Sponsor & Servicer: Ford Motor Credit Company LLC • Depositor : Ford Credit Auto Receivables Two LLC Ford Credit’s senior unsecured debt ratings: Debt type DBRS Fitch Moody’s S&P Short-term R4 B NP NP Debt Long Term B(High) BB- Ba3 B- Debt Outlook Positive Positive Stable Positive
  • 5. Review of Main Parties • Long history of securitizing the assets since 1988 • These securitization programs are diversified among asset classes and markets • Ford Credit performs its due diligence prudently using FICO scores and also keep updating their models to incorporate new factors which improve statistical probability • It regularly reviews and analyzes its portfolio of receivables.
  • 6. The Instrument • It is an Auto Loan ABS • The Servicers are treated as Third party even if they are the originators of the loan, like in this case • Auto loans use the absolute prepayment speed (APS) metric • Absolute Prepayment Speed (APS) = Number Of Loans Prepaid In A Given Period / Number Of Original Loans In Pool • Auto ABS are subject to clean-up calls: Option to purchase the receivables from the trust on any payment date when the pool balance is 5% or less of the initial pool balance
  • 7. Evaluating the Collateral • A pool of retail installment sale contracts secured by new and used cars, trucks and utility vehicle-collection on the receivables • Securities interest in the financed vehicles • Proceeds on claims on the related insurance policies • 50% of the collateral pool consists of Prime Borrowers • Only 12% are Sub-prime borrowers
  • 8. Structure Analysis Coupons: • Has a mix of both fixed and floating rates • The floating rate will bear interest determined by LIBOR+ spread(specified in the prospectus) • Issues with Swaps & Caps to mitigate interest rate risks
  • 9. Internal Credit Enhancements • Reserve Account: Equal to 1% of initial pool balance is available • Subordination: The debt is issued in tranches with cash waterfalls in the order of A, B ,C &D • Overcollateralization: The pool balance exceeding the principal amount of notes equal to 9.79% of the initial pool balance • Excess Spread: Equal to the amount of interest collections and principal collections relating to the yield supplement discount after paying the expenses • ‘Turbo’ payments for a class of notes.
  • 10. External Credit Enhancement • Creation of the special purpose vehicle to achieve bankruptcy remoteness from the originator of the underlying loans
  • 11. Payment Enhancements • Interest rate swaps with caps and floors to hedge counter party risks • Third party payments, guarantees, Letters of Credit etc
  • 12. Potential Risks • Increased competition from other auto companies • The lack of sale of new cars in the wake of economic downturn • Rising Oil prices resulting in the sale of fuel-efficient cars from other countries • Resale value of cars going down • Slow down in the auto industry
  • 13. • The number of Light truck receivables is about 37.82% which is quite high. The potential risk here could be the loss of the this market due to recession as lesser trucks will be used for goods transportation • Although the new vehicles are more in the portfolio which leads to lesser revenue as the APR of older vehicles is more than new vehicles
  • 14. • The billing addresses of the obligors of the receivables were concentrated in Texas (13.34%), California (8.34%), Michigan (6.98%) and Florida (6.18%) • Economic conditions or other factors affecting these states in particular could adversely impact the delinquency, credit loss or repossession experience of the trust and could result in delays in payments or losses on your notes.
  • 15. • Number of receivables with FICO score of more than 650 is about 70% of the total receivables which is an good indicator of low realized delinquencies of the borrowers
  • 16. APR is the payment paid by initial auto loan borrower. The income from the APR is not that high as more number of receivables(30.11%) give less amount of interest significantly reducing the weighted APR
  • 17. • The number of contracts outstanding in value and quantity has been decreasing which is a cause of worry • The delinquencies of the contracts has been steadily reducing over the years which speaks about the high credit quality of the borrowers
  • 18. • The repossesions which are causes of losses for the lender have been reducing which is a good sign • The net losses have been reducing as well • Also, the net losses as a percentage of average portfolio outstanding have been reducing which is again a good sign
  • 19. Expected ratings • The depositor expects to obtain the following ratings: Notes Rating(Moody’s) Class A-1 Notes Aaa Class A-2 Notes Aaa Class A-3 Notes Aaa Class A-4 Notes Aaa Class B Notes Aa1 Class C- Notes Aa2 Class D-Notes A1
  • 20. THANKYOU