Automakers and their captive finance companies are taking pains in financial reports to point out that their "off-balance-sheet" transactions are distinct from those that drove Enron Corp. into bankruptcy.
Thanks to Enron, the term "off-balance-sheet" hints at shady partnership deals with insiders, where Enron allegedly concealed debt and inflated its profits.
When captives such as Ford Motor Credit Co. and General Motors Acceptance Corp. say "off-balance-sheet," they are referring to asset-backed securities.
Ford Credit President Greg Smith and CFO Bibiana Boerio spent much of an April 8 press briefing in New York explaining asset-backed securities, a common way for financial institutions to raise capital.
Meanwhile, Ford Credit and GMAC have increased their reliance on asset-backed securities.
Bonds continue to be the biggest source of funding for the captives. Commercial paper had been the second-biggest source, but credit rating agencies downgraded the Big 3 captives in 2001. That raised the cost of selling commercial paper and made asset-backed deals more attractive.
Ford Credit says it is changing its funding mix. Rather than a 2-to-1 ratio of bonds to securitization, the company will seek a 1-to-1 mix. Ford Credit estimates the move will save it $330 million a year in interest.
Ford Credit cut its average cost of borrowing to 5.4 percent in the first quarter of 2002, compared with 6.5 percent in the year-ago quarter. GMAC cut its average cost of funding even more, to 4.4 percent in the quarter, from 6.4 percent a year earlier.
Asset-backed securities work like this:
An auto lender gathers a portfolio of loans, backed by the vehicles, as collateral - hence, "asset-backed." Instead of collecting the money over time from customers, the lender sells the IOUs to institutional investors, including insurance companies.
The investors collect the money as the loans are repaid, at a fixed interest rate. According to Standard & Poor's, investors earn 8 percent to 9 percent on some Ford Credit asset-backed deals.
Asset-backed securities are structured so that investors are guaranteed they will be paid in any circumstance - even if the issuer were to go bankrupt.
And that requires asset-backed securities to be "off-balance-sheet," the term Enron has made notorious.