We securitize financial assets in the ordinary course of business to improve shareowner returns. The securitization transactions we engage in are similar to those used by many financial institutions. Beyond improving returns, these securitization transactions serve as funding sources for a variety of diversified lending and securities transactions. Historically, we have used both GE-supported and third-party entities to execute securitization transactions funded in the commercial paper and term bond markets.
Securitized assets that are on-balance sheet include assets consolidated on July 1, 2003, upon adoption of FIN 46. Although we do not control these entities, consolidation was required because we provided a majority of the credit and liquidity support for their activities. A majority of these entities were established to issue asset-backed securities, using assets that were sold by us and by third parties. These entities differ from others included in our consolidated financial statements because the assets they hold are legally isolated and are unavailable to us under any circumstances. Repayment of their liabilities depends primarily on cash flows generated by their assets. Because we have ceased transferring assets to these entities, balances will decrease as the assets repay. We refer to these entities as “consolidated, liquidating securitization entities.”
In December 2004, we acquired AFIG. Securitization entities used by AFIG before our acquisition to transfer its assets, residential real estate mortgages, are required by U.S. accounting standards to be consolidated. These entities have characteristics similar to those we consolidated when we adopted FIN 46, and we intend to run off their assets. Therefore, we refer to them as consolidated, liquidating securitization entities.
The following table represents assets in securitization entities, both consolidated and off-balance sheet.
| December 31 (In millions) | 2004 (Restated) |
2003 (Restated) |
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|---|---|---|---|---|---|---|
| Receivables secured by: | ||||||
| Equipment | $ | 13,941 | $ | 15,638 | ||
| Commercial real estate | 15,747 | 16,899 | ||||
| Residential real estate — AFIG | 9,094 | — | ||||
| Other assets | 11,723 | 9,114 | ||||
| Credit card receivables | 7,075 | 8,581 | ||||
| GE trade receivables | 3,582 | 3,249 | ||||
| Total securitized assets | $ | 61,162 | $ | 53,481 | ||
| December 31 (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Off-balance sheet(a)(b) | $ | 34,417 | $ | 26,810 | ||
| On-balance sheet — AFIG | 9,094 | — | ||||
| On-balance sheet — other(c) | 17,651 | 26,671 | ||||
| Total securitized assets | $ | 61,162 | $ | 53,481 | ||
| (a) | At December 31, 2004 and 2003, liquidity support amounted to $2,300 million and $3,100 million, respectively. These amounts are net of $4,300 million and $2,400 million, respectively, participated or deferred beyond one year. Credit support amounted to $6,600 million and $5,500 million at December 31, 2004 and 2003, respectively. |
| (b) | Liabilities for recourse obligations related to off-balance sheet assets were $0.1 billion at both December 31, 2004 and 2003. |
| (c) | At December 31, 2004 and 2003, liquidity support amounted to $14,400 million and $18,400 million, respectively. These amounts are net of $1,200 million and $5,300 million, respectively, participated or deferred beyond one year. Credit support amounted to $6,900 million and $8,600 million at December 31, 2004 and 2003, respectively. |
The portfolio of financing receivables consisted of loans and financing lease receivables secured by equipment, commercial and residential real estate and other assets; credit card receivables; and trade receivables. Examples of these assets include loans and leases on manufacturing and transportation equipment, loans on commercial property, commercial loans, and balances of high credit quality accounts from sales of a broad range of products and services to a diversified customer base.
Assets in consolidated, liquidating securitization entities are shown in the following captions in the Statement of Financial Position.
| December 31 (In millions) | 2004 (Restated) |
2003 (Restated) |
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|---|---|---|---|---|---|---|
| Investment securities | $ | 1,147 | $ | 1,566 | ||
| Financing receivables — net (note 12)(a) | 22,848 | 22,085 | ||||
| Other assets | 2,408 | 2,352 | ||||
| Other, principally insurance receivables | 342 | 668 | ||||
| Total | $ | 26,745 | $ | 26,671 |
| (a) | Included $9,094 million related to AFIG. |
Off-balance sheet arrangements
We continue to engage in off-balance sheet securitization transactions with third-party entities and to use public market term securitizations. As discussed above, assets in off-balance sheet securitization entities amounted to $34.4 billion and $26.8 billion at December 31, 2004 and 2003, respectively. Gross securitization gains amounted to $1,195 million in 2004 compared with $1,394 million in 2003 and $1,796 million in 2002.
Amounts recognized in our financial statements related to sales to off-balance sheet securitization entities are as follows:
| December 31 (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Retained interests | $ | 3,637 | $ | 2,663 | ||
| Servicing assets(a) | 33 | 150 | ||||
| Recourse liability | (64 | ) | (75 | ) | ||
| Total | $ | 3,606 | $ | 2,738 | ||
| (a) | 2003 included $115 million of mortgage servicing rights sold in 2004. |
- RETAINED INTERESTS. When we securitize receivables, we determine fair value based on discounted cash flow models that incorporate, among other things, assumptions including loan pool credit losses, prepayment speeds and discount rates. These assumptions are based on our experience, market trends and anticipated performance related to the particular assets securitized. Subsequent to recording retained interests, we review recorded values quarterly in the same manner and using current assumptions. We recognize impairments when carrying amounts exceed current fair values.
- SERVICING ASSETS. Following a securitization transaction, we retain responsibility for servicing the receivables, and are therefore entitled to an ongoing fee based on the outstanding principal balances of the receivables. Servicing assets are primarily associated with residential mortgage loans. Their value is subject to credit, prepayment and interest rate risk.
- RECOURSE LIABILITY. Certain transactions require credit support agreements. As a result, we provide for expected credit losses under these agreements and such amounts approximate fair value.
The following table summarizes data related to securitization sales that we completed during 2004 and 2003.
| (Dollars in millions) | Equipment | Commercial real estate | Other assets | Credit card receivables | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | ||||||||||||
| Cash proceeds from securitization | $ | 5,367 | $ | 4,578 | $ | — | $ | 8,121 | ||||
| Proceeds from collections reinvested in new receivables | — | — | 21,389 | 5,208 | ||||||||
| Cash received on retained interest | 107 | 70 | 128 | 1,788 | ||||||||
| Weighted average lives (in months) | 37 | 68 | — | 7 | ||||||||
| ASSUMPTIONS AS OF SALE DATE(a) | ||||||||||||
| Discount rate | 8.2 | % | 13.0 | % | — | 12.2 | % | |||||
| Prepayment rate | 9.1 | % | 11.2 | % | — | 14.9 | % | |||||
| Estimate of credit losses | 1.9 | % | 1.1 | % | — | 8.9 | % | |||||
| 2003 | ||||||||||||
| Cash proceeds from securitization | $ | 5,416 | $ | 3,082 | $ | 2,009 | $ | — | ||||
| Proceeds from collections reinvested in new receivables | — | — | 14,047 | 11,453 | ||||||||
| Weighted average lives (in months) | 29 | 72 | 106 | 7 | ||||||||
| ASSUMPTIONS AS OF SALE DATE(a) | ||||||||||||
| Discount rate | 6.6 | % | 11.5 | % | 6.4 | % | 11.2 | % | ||||
| Prepayment rate | 10.1 | % | 10.8 | % | 4.6 | % | 15.0 | % | ||||
| Estimate of credit losses | 1.6 | % | 1.6 | % | 0.2 | % | 10.8 | % | ||||
| Cash receipts related to servicing and other sources were less than $300 million in 2004. | |
| (a) | Based on weighted averages. |
Key assumptions used in measuring the fair value of retained interests in securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are noted in the following table. These assumptions may differ from those in the previous table as these related to all outstanding retained interests as of December 31, 2004.
| (Dollars in millions) | Equipment | Commercial real estate | Other assets | Credit card receivables | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| DISCOUNT RATE(a) | 7.3 | % | 8.6 | % | 6.7 | % | 11.3 | % | ||||
| Effect of: | ||||||||||||
| 10% Adverse change | $ | (10 | ) | $ | (13 | ) | $ | (19 | ) | $ | (9 | ) |
| 20% Adverse change | (20 | ) | (26 | ) | (37 | ) | (17 | ) | ||||
| PREPAYMENT RATE(a) | 9.4 | % | 3.2 | % | 1.1 | % | 12.2 | % | ||||
| Effect of: | ||||||||||||
| 10% Adverse change | $ | (6 | ) | $ | (4 | ) | $ | (9 | ) | $ | (35 | ) |
| 20% Adverse change | (12 | ) | (9 | ) | (19 | ) | (65 | ) | ||||
| ESTIMATE OF CREDIT LOSSES(a) | 1.8 | % | 0.4 | % | 0.5 | % | 8.0 | % | ||||
| Effect of: | ||||||||||||
| 10% Adverse change | $ | (11 | ) | $ | (8 | ) | $ | — | $ | (34 | ) | |
| 20% Adverse change | (23 | ) | (17 | ) | (2 | ) | (67 | ) | ||||
| Remaining weighted average lives (in months) | 35 | 101 | 62 | 8 | ||||||||
| Net credit losses | $ | 54 | $ | 7 | $ | 25 | $ | 465 | ||||
| Delinquencies | 78 | 38 | 10 | 256 | ||||||||
| (a) | Based on weighted averages. |
GUARANTEE AND REIMBURSEMENT CONTRACTS. We provide protection to certain counterparties of interest rate swaps entered into by securitization-related entities related to changes in the relationship between commercial paper interest rates and the timing and amount of the payment streams. These arrangements provide protection for the life of the assets held by the SPE but generally amortize in proportion to the decline in underlying asset principal balances. At December 31, 2004, the notional amount of such support was $1.8 billion and related assets and liabilities were insignificant.
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