Ford Credit Hit with Steep Charge on Lease-End Residuals
DEARBORN, Mich. — Ford Motor Credit completed its North America operating lease review over the second quarter and reported today that it is taking a hefty hit after discovering that lease-end residual values will likely be significantly lower than previously expected for full-size trucks and SUVs.
In fact, the company is reporting a pre-tax impairment charge of $2.1 billion due to revamped off-lease residual expectations.
The full-size models are already bringing in lower than anticipated auction values, Ford Credit indicated.
Basically, higher fuel prices and the weak economic climate in North America resulted in a pronounced shift in consumer preferences from full-size trucks and traditional SUVs to smaller, more fuel-efficient vehicles, and the company is suffering as a result.
The captive reported a net loss of $1.427 billion in the second quarter of 2008, down $1.489 billion from net income of $62 million a year earlier.
On a pre-tax basis, Ford Credit posted a loss of $2.380 billion, compared with earnings of $112 million in the previous year.
Excluding a $2.1 billion impairment charge for operating leases, Ford Credit said it incurred a pre-tax loss of $294 million in the second quarter.
The decrease in pre-tax earnings primarily reflected the impairment charge for operating leases, higher depreciation expense for leased vehicles and a higher provision for credit losses, executives explained.
These were offset partially by the non-recurrence of net losses related to market valuation adjustments from derivatives; a higher financing margin; a gain related to the sale of approximately half of the company's ownership interest in its Nordic operations; and lower operating costs.
"Dramatic, rapid marketplace changes are driving increased weakness in the vehicle auction markets, in turn affecting the entire industry, including Ford Motor Credit," explained Mike Bannister, chairman and chief executive officer of Ford Credit.
"We regularly review and adjust lease residual values to align with market conditions. In addition, the core of our business remains strong, because it is built upon lending practices, risk management and collections activities that are consistent and prudent," he added.
On June 30, 2008, Ford Credit's on-balance sheet net receivables totaled $136 billion, compared with $141 billion at year-end 2007.
Managed receivables were $140 billion, down from $147 billion on Dec. 31, 2007.
"The lower receivables were more than explained by lower North America receivables, the impact of divestitures and the impairment charge for operating leases, which were offset partially by changes in currency exchange rates," officials concluded.