Securitization of Receivables

6 Months Ended

May 03, 2020

Securitization of Receivables

Securitization of Receivables

(5)  Securitization of Receivables

The Company, as a part of its overall funding strategy, periodically transfers certain Receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.

In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third party investors result in secured borrowings, which are recorded as “Securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Retail notes securitized” on the balance sheet. The total restricted assets on the consolidated balance sheet related to these securitizations include the retail notes securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the retail notes securitized or a fixed percentage of the outstanding balance of the retail notes securitized. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.

In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the Receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $3,017.3 million, $2,894.4 million, and $2,770.9 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) of these SPEs totaled $2,976.9 million, $2,847.2 million, and $2,693.4 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $505.3 million, $447.0 million, and

$611.7 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) were $477.8 million, $420.5 million, and $572.4 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively.

In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $1,220.4 million, $1,079.2 million, and $1,477.2 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) related to these conduits were $1,153.9 million, $1,015.2 million, and $1,382.0 million at May 3, 2020, November 3, 2019, and April 28, 2019, respectively.

The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets was as follows (in millions of dollars):

	May 3
	2020
Carrying value of liabilities	$	1,153.9
Maximum exposure to loss		1,220.4

The total assets of unconsolidated VIEs related to securitizations were approximately $37.1 billion at May 3, 2020.

The components of consolidated restricted assets related to secured borrowings in securitization transactions were as follows (in millions of dollars):

	May 3		November 3		April 28
	2020		2019		2019
Retail notes securitized	$	4,664.1	$	4,349.6	$	4,766.4
Allowance for credit losses		(16.4)		(11.2)		(11.7)
Other assets		95.3		82.2		105.1
Total restricted securitized assets	$	4,743.0	$	4,420.6	$	4,859.8

The components of consolidated secured borrowings and other liabilities related to securitizations were as follows (in millions of dollars):

	May 3		November 3		April 28
	2020		2019		2019
Securitization borrowings	$	4,603.5	$	4,277.0	$	4,643.9
Accrued interest on borrowings		5.1		5.9		3.9
Total liabilities related to restricted securitized assets	$	4,608.6	$	4,282.9	$	4,647.8

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At May 3, 2020, the maximum remaining term of all restricted securitized retail notes was approximately seven years.