Securitization of Receivables

12 Months Ended

Oct. 30, 2022

Securitization of Receivables

Securitization of Receivables

Note 5. Securitization of Receivables

As a part of its overall funding strategy, the Company periodically transfers certain Receivables (retail notes) into VIEs that are 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 does 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, which in turn issue debt to investors, or to non-VIE banking operations, which provide funding directly to the Company. The funding provided by these third parties result in secured borrowings, which are recorded as “Securitization borrowings” on the consolidated balance sheets. The securitized retail notes are recorded as “Retail notes securitized” on the consolidated balance sheets. The total restricted assets on the consolidated balance sheets 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 $5,037.6 million and $3,093.6 million at October 30, 2022 and October 31, 2021, respectively. The liabilities (securitization borrowings and accrued interest) of these SPEs totaled $4,767.9 million and $3,024.0 million at October 30, 2022 and October 31, 2021, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

The Company has a revolving warehouse facility to utilize bank conduit facilities to securitize retail notes, described further in the following paragraphs. At October 30, 2022, the facility had a total capacity, or “financing limit,” of up to $1,000.0 million of secured financings at any time. The agreement was renewed in November 2022 with an expiration in November 2023 and a capacity of $1,500.0 million.

Through the revolving warehouse facility, 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 $842.8 million and $1,175.8 million at October 30, 2022 and October 31, 2021, respectively. The liabilities (securitization borrowings and accrued interest) related to these conduits were $759.3 million and $1,112.8 million at October 30, 2022 and October 31, 2021, 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 at October 30, 2022 was as follows (in millions of dollars):

	2022
Carrying value of liabilities	$	759.3
Maximum exposure to loss		842.8

The total assets of the unconsolidated conduits related to securitizations were approximately $18 billion at October 30, 2022.

In addition, through the revolving warehouse facility, the Company transfers retail notes to banks, which may elect to fund the retail notes through the use of their own funding sources. These non-VIE banking operations are not consolidated since the Company does not have a controlling interest in them. 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 $210.7 million and $486.1 million at October 30, 2022 and October 31, 2021, respectively. The liabilities (securitization borrowings and accrued interest) were $189.8 million and $460.1 million at October 30, 2022 and October 31, 2021, respectively.

The components of consolidated restricted assets, secured borrowings, and other liabilities related to secured borrowings in securitization transactions at October 30, 2022 and October 31, 2021 were as follows (in millions of dollars):

	2022		2021
Retail notes securitized	$	5,951.6	$	4,662.4
Allowance for credit losses		(15.7)		(13.5)
Other assets (primarily restricted cash)		155.2		106.6
Total restricted securitized assets	$	6,091.1	$	4,755.5
Securitization borrowings	$	5,710.9	$	4,595.2
Accrued interest on borrowings		6.1		1.7
Total liabilities related to restricted securitized assets	$	5,717.0	$	4,596.9

Securitization borrowings are presented net of debt acquisition costs. 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 on cash flows generated by the restricted assets. Depending on the Company’s ability to obtain and meet certain pre-established credit rating criteria, cash collections from these restricted assets are required to be placed into a segregated collection account either on a daily basis or immediately prior to the time payment is required to the secured creditors. At October 30, 2022, the maximum remaining term of all restricted securitized retail notes was approximately seven years.

Although these securitization borrowings are classified as short-term since payment is required if the retail notes are liquidated early, the expected payment schedule for these borrowings at October 30, 2022 based on the expected liquidation of the retail notes in millions of dollars is as follows: 2023 - $2,702.7, 2024 - $1,662.0, 2025 - $955.3, 2026 - $373.2, 2027 - $24.9, and later years - $2.8.