Ford Motor Credit Company LLC (Ford Credit)

Ford Motor Credit Company LLC (also known as Ford Credit) is the financial services arm of the Ford Motor Company. Think of it as the in-house bank for Ford. Its main job isn't to build cars, but to make it easier for people and dealerships to buy them. When you walk into a Ford dealership and the salesperson offers you a loan or a lease to get that shiny new Mustang, you're likely dealing with Ford Credit. It is a classic example of a captive finance company, meaning it's a subsidiary created by a large manufacturing company primarily to provide financing for its own products. This setup is a win-win: Ford sells more cars because financing is readily available, and Ford Credit earns a profit from the interest charged on those loans and leases. For investors, understanding Ford Credit is crucial because its financial health offers a powerful, real-time indicator of the parent company's sales performance and the credit quality of its customers.

Ford Credit's business model is quite straightforward, revolving around two main customer types:

• Retail Customers: This is the biggest part of their business. They provide loans (retail installment contracts) and leases directly to consumers who are buying Ford and Lincoln vehicles. They make money on the spread between their cost of borrowing money and the interest rate they charge customers.
• Dealerships: Known as wholesale financing or “floorplan” financing, Ford Credit lends money to dealerships so they can stock their lots with cars. The dealership pays interest on this loan until the cars are sold to customers.

To fund all these loans, Ford Credit doesn't just use its own cash. It frequently packages its auto loans into bundles and sells them to investors in the financial markets as asset-backed securities (ABS). This process provides them with fresh capital to issue even more loans, keeping the entire cycle moving.

For a value investing practitioner, Ford Credit is more than just a financing company; it's a treasure trove of information about its parent, Ford Motor Company, and a potential investment in its own right.

Ford Credit is one of the largest issuers of corporate bonds in the world. Investors can buy these bonds to receive regular interest payments. The key here is to assess the risk versus the reward.

• Credit Ratings: Keep a close eye on the credit rating assigned to Ford Credit's debt by agencies like Moody's and S&P. A higher rating means lower perceived risk of default. A downgrade can signal trouble.
• Default Risk: The primary risk is that a significant number of car buyers will stop making their loan payments, especially during an economic downturn. An investor must assess the economic climate and the quality of Ford Credit's loan portfolio. Rising unemployment is a major red flag.

This is where the real magic happens for equity investors analyzing Ford Motor Company (the carmaker). Ford Credit's financial reports can give you clues that you won't find just by looking at the parent company's numbers.

• Loan Origination Volume: An increase in the volume of new loans written by Ford Credit is a strong sign that Ford is selling more cars. A sudden drop can be an early warning of slowing sales.
• Credit Loss Provisions: On Ford Credit's balance sheet, look for a line item called the 'allowance for credit losses'. If the company is increasing this allowance, it means they expect more customers to default on their loans in the future. This is a direct reflection of their assessment of their customers' financial stability.
• Interest Rate Sensitivity: The profitability of Ford Credit is highly sensitive to changes in interest rates. When rates rise, its cost of borrowing goes up, potentially squeezing its profit margins unless it can pass those higher costs on to car buyers.

In essence, by analyzing Ford Credit, a savvy investor gets a behind-the-scenes look at Ford's sales trends and the financial health of its customer base. During the Great Recession of 2008, the struggles of captive finance arms like Ford Credit were a major indicator of the deep trouble facing the auto industry.

• Ford Credit is the captive finance arm of Ford Motor Company, providing loans and leases for its vehicles.
• It makes money primarily from the interest on consumer auto loans and wholesale financing for dealerships.
• For investors, Ford Credit offers two main opportunities: buying its bonds for income or analyzing its financial health as a proxy for the performance of the parent, Ford Motor Company.
• Key metrics to watch are loan volumes, credit loss provisions, and its official credit rating.