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PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(All tables in millions, except per share data)
13. ASSET SECURITIZATIONS
The Company securitizes installment loan receivables
through a $1.0 billion commercial paper warehouse facility with
unrelated financial institutions. During 2000, the Company sold
unsecured installment loan finance receivables of $580.1 million
under this program, net of retained interests. The Company continues
to service and receive annual servicing fees on the outstanding
balance of securitized receivables. The Company also retains a
subordinated interest in the sold receivables and the rights to
future cash flows arising from the receivables after the investors
receive their contractual return. The Company provides additional
credit enhancement in the form of restricted cash deposits. At
December 31, 2000, $576.3 million was outstanding under this program,
net of retained interests. As further discussed in Note 12,
Derivative Financial Instruments, the Company enters into interest
rate protection agreements to manage the interest rate changes
on amounts securitized and on the Company's retained interests.
The Company also securitizes installment loan
receivables through the issuance of asset-backed notes through
a non-consolidated special purpose entity under a $2.0 billion
shelf registration statement. Through December 31, 2000, $1.48
billion has been issued and approximately $521.5 million remains
to be issued under this program. The Company uses proceeds from
these notes to refinance installment loans previously securitized
under the warehouse facility and to securitize additional loans
held by the Company. The Company provides credit enhancement related
to these notes in the form of overcollateralization, a reserve
fund and a third party surety bond. The Company retains responsibility
for servicing the loans for which it is paid a servicing fee.
During 2000, approximately $691.7 million in additional asset-backed
notes were issued and at December 31, 2000, $1.0 billion was outstanding
under this program, net of retained interests.
These transactions typically result in the
recording of a securitization asset in the form of an interest-only
strip which represents the present value of the future residual
cash flows from securitized receivables. The investors and the
securitization trusts have no recourse to the Company's assets
for failure of debtors to pay when due except to the extent of
the Company's rights to future cash flow and any subordinated
interest the Company retains.
In 2000, recognized pre-tax gains on the securitization
of installment loan receivables were not material to the Company's
Consolidated Financial Statements.
A summary of cash flows received from securitization
trusts for the year ended December 31, 2000, were as follows:
Proceeds from securitizations under warehouse facility ........ $ 580.1
Proceeds from securitizations under shelf registration ........ 691.7
Servicing fees received ....................................... 17.4
Other cash flows received on retained interests(1) ............ 70.7
Purchases of assets from warehouse facility ................... (639.6)
--------
$ 720.3
========
(1) Other cash flows primarily include cash flows
from interest-only strips and other retained interests, excluding
servicing fees.
The key economic assumptions used in measuring
the retained interests and net initial gains or losses at the date
of securitization resulting from securitizations completed during
the year ended December 31, 2000 were as follows:
Description: Assumption(1)
------------ --------------
Voluntary prepayment speed (ABS) ........................... 1.33%
Weighted-average life (in years) ........................... 1.72
Expected credit losses (annual rate) ....................... 1.08%
Discount rate on residual cash flows (annual rate) ......... 9.50%
Yield (interest rate on receivables) ....................... 12.05%
Variable rate to investors ................................. 7.39%
(1) The weighted-average rates for securitizations
entered into during the period for securitizations of loans with
similar characteristics.
At December 31, 2000, the carrying value (current
fair value) of the interest-only strips was $68.5 million, with
a weighted-average life of 1.58 years. The sensitivity of the current
fair value of the residual cash flows to 10 percent and 20 percent
unfavorable changes in assumptions are presented in the table below.
These sensitivities are hypothetical and should not be considered
to be predictive of future performance. The effect of a variation
in a particular assumption on the fair value of the residual cash
flow is calculated independently from any change in another assumption.
In reality, changes in one factor may contribute to changes in another
(for example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or
counteract the sensitivities. Furthermore, the estimated fair values
as disclosed should not be considered indicative of future earnings
on these assets. The current annual rate assumptions reflect expected
performance of the total loans securitized as of December 31, 2000.
$ Effect on Interest-Only Strip of
----------------------------------
Current 10% Change 20% Change
Description: Rate Assumption in Assumption in Assumption
------------ ----------------- --------------- ----------------
Voluntary prepayment speed (ABS) ................. 1.16% $ 2.4 $ 4.8
Expected credit losses (annual rate) ............. 1.06% $ 2.2 $ 4.3
Discount rate on residual cash flows
(annual rate) .................................. 9.50% $ 1.0 $ 1.9
Variable rate to investors (annual rate) ......... 7.30% $ 16.6 $ 32.9
As of December 31, 2000, the Company had expected
static pool credit losses of 2.28%, which would have averaged to
an annual rate of 1.13%.
The following summarizes information about managed
or securitized installment loans and delinquencies and net credit
losses at December 31, 2000:
Total Principal Principal Amount of Loans
Amount of Loans 60 Days or More Past Due
----------------- --------------------------
Loans securitized .......................... $ 1,619.2 $ 7.8
Loans retained on balance sheet ............ 50.3 .4
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Total loans managed or securitized ......... $ 1,669.5 $ 8.2
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Net credit losses are charge-offs less recoveries
and are based on total installment loans managed or securitized.
Net credit losses during the year ended December 31, 2000 totaled
$31.5 million.
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Form
10-K 
