Ford Credit sells loans to Bear Stearns

Yahoo/FT.com ^ | Tue Nov 19, 2002 10:30 PM ET | Jeremy Grant

[arete]

Ford Credit, the world's largest automotive finance company, on Tuesday opened up a new avenue in its funding efforts by selling $3bn of its vehicle leasing and loan portfolio to Bear Stearns, the US investment bank.

The deal is the first of its kind on this scale in the automotive industry.

It involves the sale by Ford Credit of a chunk of its loan portfolio to Bear Stearns in an arrangement similar to that used in the US home mortgage market.

The move provides some relief to Ford Motor Company, the company's parent, which is struggling to finance its generous "zero per cent" incentive schemes amid concerns at credit rating agencies over the health of its automotive business.

Ford helps Ford Credit fund such schemes by paying it a subsidy equal to the difference between a standard commercial interest rate and the 0 per cent offered to consumers.

Ford Credit also borrows heavily on the capital markets to maintain its current $205bn loan and lease portfolio.

However, credit rating downgrades of the parent company have virtually shut Ford Credit out of the commercial paper market and have forced it to try to diversify into alternative, cheaper funding sources. It has raised more than $20bn so far this year on the asset-backed, or securitised, markets.

Unlike in a traditional securitisation, the latest "whole loan sale" means Ford Credit retains no interest in the loans and receives no income, while the risk associated with possible loan defaults is transferred to the buyer.

"I think it shows that they [Ford Credit] continue to underwrite attractive retail paper that can be sold and it's a source of perhaps not ongoing funding, but a way for them to lower their overall funding needs," said David Andrews, fixed income auto analyst at UBS.

Ford Credit said it would continue to service the loan and lease contracts for a fee, and would retain the servicing income and customer relationship.

It also said it regarded the Bear Stearns deal as the start of a programme of further whole loan sales, but declined to say when it would next use the method, or how much it planned to raise this way.

"We have to look at the costs but we do see it as an important new source," Ford Credit said.

"We hope the programme will eventually include other purchasers such as insurance companies and commercial banks."

Moody's, the credit rating agency, last week affirmed its ratings for Ford Motor Company at Baa1. In October Standard & Poor's downgraded it to BBB with a negative outlook.

[arete]

It involves the sale by Ford Credit of a chunk of its loan portfolio to Bear Stearns in an arrangement similar to that used in the US home mortgage market.

So Ford bumps the debt. Bear Stearns buys the debt. Bear Sterns will repackage the crap and sell it off to bond and money market funds. That way, all the small investors and savers can take it in the neck to protect Ford. Ah yes, yet another fine example of Greenspan's new economy.

Richard W.

[arete]

FYI

Comments and opinions welcome.

Richard W.

[palmer]

I don't understand why anyone would buy the debt from BS when they could buy Ford bonds and get 7.5%

[arete]

Heck, who knows how BS will repackage this stuff or what it will look like when they're done. Greenspan has somehow managed to take all the risk out of borrowing money and put it all on the people who save. It's the new new economy. I think the idea is to force people to spend while protecting Wall Street from debt risk. This has to be the biggest flim flam scam of all ages.

Richard W.

[imawit]

In about 2yrs look for Bear Stearns "Certified Used Cars". After all aren't these securitized by rolling stock which are leases and purchases.

Any and all long term contracts, interest bearing or not are being monetized. Next will be refrigerators & TV's. And finally super market credit card purchases.

Our last resort, future salaries being monetized and or course not having to be paid out if the employee is ever terminated for any reason.

[imawit]

This is actually very bad. It's Advanced Pawn Shop 101 where the shop owner can now sell his contracts for reclaim.

The only problem is this asset declines in value !

And, what this means is the auto & all supporting industries are in big trouble. In the effort to be most competitive, all of the manufacturers net profits are in the financing, not the car and all auto manufacturers have had to go into this scheme with pricing to be competitive.

How much are these contracts really worth ? Zero after 3-5 yrs unless one then picks up the asset which is now 20 to 30% of its original value. Sure, these contracts may have been fulfilled but not 100% and I bet Ford didn't get 100% of contract value.

Is BS nuts or is there something under the table in the terms that is not being announced ?

[imawit]

This is actually very bad. It's Advanced Pawn Shop 101 where the shop owner can now sell his contracts for reclaim.

The only problem is this asset declines in value !

And, what this means is the auto & all supporting industries are in big trouble. In the effort to be most competitive, all of the manufacturers net profits are in the financing, not the car and all auto manufacturers have had to go into this scheme with pricing to be competitive.

How much are these contracts really worth ? Zero after 3-5 yrs unless one then picks up the asset which is now 20 to 30% of its original value. Sure, these contracts may have been fulfilled but not 100% and I bet Ford didn't get 100% of contract value.

Is BS nuts or is there something under the table in the terms that is not being announced ?