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                                       Automobile / Banks
                                                                                         5 December 2006
Automobile captive finance companies:                                            p. 3
an undervalued asset?
                                                                                 p. 3
    ►       Summary – conclusion
    ►    Captive finance companies (CFCs): a key element in an automobile        p. 4
         manufacturer’s strategy
        o A key link in the value-added chain                                    p. 4
        o Automobile financing: a growth driver for automakers                   p. 6
        o Customers financed by the captives remain more loyal                   p. 8
        o Advantages and disadvantages of diversification for CFCs               p. 9

    ►    Does it make sense for an automaker to wholly own its CFC?              p. 12
        o A substantial and recurring earnings contribution                      p. 12
        o Ideal complementarity in terms of cash flow                            p. 13
        o Are the risks inherent to captive finance companies worthwile?         p. 15
              Captive finance companies’ key factors of success
              What are the risks specific to a CFC? Do they really pose an
              additional threat to the manufacturer?
        o Lessons to be drawn from Fiat/Fidis and GM/GMAC                        p. 20
    ►    An undervalued asset?                                                p. 23
        o  Status differ from one captive finance company to the next         p. 23
        o  Does the captive finance company systematically deserve a better   p. 24
           rating than the carmaker?
               Our opinion: a notching-up is justified                        p. 25
               Rating agencies’ approach in normal circumstances…             p. 26
               …and when the carmaker is facing severe difficulties           p. 28
        o Is the spread differential sufficient?                              p. 30
        o Are captive finance companies undervalued by the shareholders of thep. 31
    ►       Appendices
        o     Glossary                                                           p. 38
        o     Breakdown of cash flows between the manufacturer and its captive   p. 39
        o     The statutes of the various captive finance companies              p. 40
        o     Organization charts of each carmaker and its CFC                   p. 42

                                                                                               Source: Getty Images
Ludovic FAVA                  Gwenaelle LERESTE        Georges DIENG
IXIS CIB                      IXIS CIB                 IXIS Securities
01 58 55 07 06                01 58 55 17 19           01 58 55 05 34  
p.2   5 December 2006   Spreads & Credits Autos
Automobile captive finance companies: an undervalued
Summary / Conclusion
Automobile manufacturers’ captive finance companies (CFCs) provide all the financial services related to automobile sales
and cater to three types of client: private owners, companies and the manufacturer’s dealer network. CFCs now account for
nearly 50% of auto makers’ balance sheets in Europe and two-thirds in the case of GMAC and FMC and, in some cases, an
even higher portion of their results, but these activities remain misunderstood. And yet, as we will see, they are less likely to
default than carmakers and their recovery rate is much stronger, suggesting they deserve a higher credit rating. CFCs also
offer better prospects as far as spreads are concerned since carmakers tend to protect their CFCs that are of interest only if
they offer attractive financing conditions. This means they need to be able to refinance at competitive levels.
Part 1 of this report shows the CFC’s importance as a strong link in the automotive value chain. This essential commercial tool
supports and promotes the carmaker’s sales both in terms of volumes (customers purchasing vehicles through credit renew
their cars more frequently) and value (higher transaction price, more options and associated services included in packages).
Furthermore, thanks to an active use of the customer databank, clients financed by the CFC remain more loyal to the
carmaker. CFCs are also a means of gaining market share in emerging markets. All told, they are of key strategic importance
for auto makers.
But there is the issue of whether it makes sense for a carmaker to own 100% of its CFC, particularly following GM’s recent
disposal of a 51% in GMAC. The second section of this report looks at this question and argues that car manufacturers,
whose results are cyclical by nature, have much to gain from holding 100% of a company that provides a growing, predictable
and recurring earnings base. Furthermore, CFCs generate quite a high ROE (14.5% on average over 3 years) for a limited
amount of invested capital. Not only that, CFCs also offer manufacturers favourable complementarity in terms of cash flows.
Admittedly, there are potential risks inherent in the CFCs’ activities (client default risk, funding needs and liquidity risks,
interest rate risk). However, they are fairly limited compared to the intrinsic risks linked to the automobile activities of a
carmaker. The logic behind GM and Fiat selling majority stakes in GMAC and Fidis is motivated to large extent by the fact that
a CFC has to have access to the bond market and needs to be investment grade to issue bonds at a competitive price.
Further evidence that bond investors should be interested in this particular type of issuer.
The last section deals with the question of CFC valuation, particularly from an equity market standpoint. When the market
attributes a specific value to the captive finance company, the general rule of thumb is one times their book value irrespective
of their profitability level. Not only is this practice unfair, in that it is insufficiently discriminating, it also generally results in the
asset being undervalued, as this multiple tends to equate to a floor-level. Based on the three valuation models given at the
end of the report, 1.4-2.2x equity looks a more suitable yardstick. On this basis, CFCs represent on average 45% of the
market capitalisation of carmakers.
If the market were to take this approach on board, carmakers would naturally enjoy a rerating due to the correction of the
undervaluation generally suffered by CFCs. Based on this logic, it is interesting to note the relatively low multiples (EV/Sales
and EV/EBIT) attributed to carmakers’ industrial activities based on our 2008 forecasts, particularly for BMW, DCX and PSA.
In conclusion, we believe the revaluation of carmakers’ CFCs offers clear rerating potential. This process is likely to be
gradual and there will need to be a more concerted communications strategy on the part of manufacturers if they are to
improve the market’s knowledge of captive finance companies and unlock the hidden value inherent in this largely
misunderstood business. If the markets can be suitably convinced, it should be possible to narrow the gap between the
minimalist approach that values CFCs on the basis of one times equity and a more realistic and discriminating valuation, such
as the one we advocate in this report.

Key figures of the carmakers’ captive finance companies (2005)
                                   Banque PSA          RCI Banque
                                                                              VW FS            BMW FS        DC FS (DCX) Fidis retail (Fiat)             GMAC         FMC (Ford)
                                       Finance           (Renault)
Total assets (auto & other)              € 27bn             € 26bn                  € 64bn         € 44bn            € 100bn                € 10bn       $ 320bn         $ 162bn
Penetration rate                           27%                35%                     30%            41%                 41%                   26%           42%             39%
Business diversification                     No                Low                    High            Low            Average                    No           High             Low
Leasing (% total receivables)              24%                26%                     34%            33%                 37%                   14%        10% (*)            16%
Bank status                                 Yes                Yes                   No (ù)         No (ù)             No (ù)                   No          No (ù)          No (ù)
Dividend paid (% NP)              € 161m (40%)       € 180m (58%)            € 483m (99%)              NA € 1,288m (126%)            € 25m (33%) $ 2,500m (104%) $ 2,750m (110%)
PBT 2005                                € 608m             € 457m               € 972m (°)        € 605m        € 1,679m (§)               € 125m       $ 3,599m        $ 3,861m
3Y average ROE (#)                       17.1%              16.3%                   15.7%          13.2%               15.6%                  9.0%         13.1%           18.6%
Quality of the assets                 Very good              Good                    Good           Good                   ND                Good        Average              Low
Equity 2005                             € 2.4bn            € 2.1bn              € 5.8bn (°)       € 4.6bn             € 9.1bn              € 0.9bn       $ 21.8bn        $ 10.7bn
Liquidities (amount, quality…)            Good           Very good               Very good     Very good                Good              Average            Low             Low
Sources: companies, IXIS CIB
(*) 24% excluding receivables from the mortgage business                (ù) VW FS, BMW FS, DC FS and GMAC have a bank subsidiary in Germany and FMC has one in UK (see appendix)
(°) PBT and equity excluding Europcar that has been disposed in 2006
(§) PBT of the segment "Financial Services" as it is disclosed by DCX in its P&L breakdown            (#) ROE = net profit / average equity

Spreads & Credits Autos                                                   5 December 2006                                                                                    p.3
                      Captive finance companies: a key element
                      in an automaker’s strategy
                      Automobile manufacturers’ captive finance companies (CFCs) provide all the financial services
                      related to automobile sales. In the past, S&P defined CFCs as entities with more than 70% of
                      their loans tied to the manufacturer’s business (mainly financing vehicles sold by the
                      automaker), irrespective of ownership interests between the manufacturer and the captive
                      finance company. This definition is no longer used today, but it clearly illustrates how the
                      captive finance company’s mission is dedicated primarily to vehicle financing for the
                      manufacturer’s brands. Thus even though Fiat will only own a 50% interest in the joint venture
                      Fiat Auto Financial Services, the company will be considered the Italian automaker’s captive
                      finance company. The same approach would also apply to GMAC, even if 51% of that
                      company’s equity has been sold to the consortium led by Cerberus. Conversely, we do not
                      consider ResCap, GMAC’s mortgage business, to be a captive finance company in the real
                      sense of the term, even though it is still 100% owned by GMAC.

                      Captive finance companies operate as credit institutions, even if they do not share the full range
                      of business activities. CFCs also rank among the larger global credit institutions based on total
                      assets. With € 120 billion in total assets, for example, Ford Motor Credit was still the 10th
                      largest US bank in 2005.

                     Ranking of main captive finance companies by total assets (€bn)
































                     (*) of which € 160b n for auto financing
                     (§) including North and South America, excluding Europcar - (#) Japan (NFS) and USA (NMAC)
                     Sources: 2005 annual reports

                      1. A key link in the value-added chain
CFCs provide a        A captive finance company’s mission is to provide a complete range of financing and services
complete range of     to three types of clients, namely 1) individuals, 2) companies and 3) the manufacturer’s
financing and         dealership network. With respect to the first two types, they offer a large range of services,
services to           including traditional loans for new or used vehicle purchases, renting with purchase options,
individuals,          leasing, long-term rentals and, more and more, related services (insurance, assistance,
companies and the     maintenance, guarantee extensions, fleet management, etc.). The CFC’s third main client is the
manufacturer’s        manufacturer’s dealership network. The CFCs finance new and used vehicle stocks and spare
dealership network    parts. They can also provide cash management. Few of them even propose to finance the
                      dealers’ capital expenditure and offer them insurance packages.

  p.4                                         5 December 2006                                             Spreads & Credits Autos
                                Captive finance companies’ business lines on behalf of different client groups
                                                          Individuals                                                Companies                                                                                                                                                                   Dealer network
                                   Conventional financing product (on new or
                                   used vehicle)                                                Financial leasing without a buy-back                                                                                                          Pledged loans: inventories (new and used
                                                                                                commitment from the group                                                                                                                     vehicles, spare parts)

                                   Retail balloon
                                                                                                                                                                                                                                              Unpledged loans: credit facilities, medium
                                                                                                Operating leases
                                                                                                                                                                                                                                              term loans
                                   Long term rental

                                   Revolving credit cards
                                                                                                Fleet management (without financing)
                                   Consumer credit

                                   Deposit banking

                                                                                  Associated services
                                                                            Insurance (for the car or the loan)
                                                                                Repair and maintenance
                                                                         Warranty extension (new and used cars)
                                                                                    Courtesy vehicle
                                Sources: carmakers (in particular RCI Banque)

                                   The two charts below show the relative weights of the different business lines, expressed as a
                                   percentage of total managed receivables. Clearly, leasing plays a bigger role with the German
                                   and US captive finance companies than it does with the French CFCs. These charts also
                                   illustrate that, with the exception of VW FS and GMAC, the CFCs have relatively similar
                                   business activities and little in the way of diversification.

                                Receivables breakdown by category                                                          Receivables breakdown by category
                                100%                                                                                         100%
                                                                                                     Others                    90%

                                  80%                                                                                          80%
                                                                                                                                                                                                                                                                                                                                                               Classic                                      loans
                                                                                                     W holesale                40%                                                                                                                                                                                                                             loan to
                                  40%                                                                financing                                                                                                                                                                                                                                                 retail                                       W holesale
                                                                                                                               30%                                                                                                                                                                                                                             customer                                     financing
                                                                                                     Retail financing                                                                                                                                                                                                                                          wholesale
                                  20%                                                                                                                                                                                                                                                                                                                                                                       Retail
                                   0%                                                                                                                               DCFS                                           GMAC                                      GMAC                                FMC                     BMW FS
                                           Fidis Retail    RCI Banque      Banque PSA   VW FS AG
                              Sources: annual reports, IXIS CIB                                                            Sources: annual reports, IXIS CIB

 60% of profits in the             According to Volkswagen, which has one of the CFCs with the widest range of activities, more
 automobile business are           than 60% of the automobile business profits are generated in the distribution and financing
 generated through                 stages, as illustrated in the left-hand chart below. The CFCs therefore play a vital role for
 distribution and financing        automobile manufacturers in their value-added chain (right-hand chart).

                                Role of services in automobile business
                                                                                                                           Automobile business’s value chain
                                                                                                                                                                                               Automobile business - value chain
                                                      Distribution and
                                                                                                    New car retailing         Industrial activities                                                                                                                                           Financing activities
                                                            62%                                                           Sales                                                  39% (*)                                                                        12%                                                     30%                                              8%
                                 Carmakers'                                                                               Profits                                                  8%                                                                                                                                                                                    11%
                                                                                                                                                                                                                                                                30%                                                     46%
                                                                                                                               Conception (R&D, product strategy)

                                                                                                                                                                                     (Optimisation of production capacity,

                                                                                                                                                                                                                                                                                                                                                                          Sale and financing of used cars

                                                                                                                                                                                                                                                                                                                                                                                                              mortgage loans, consumer credit)
                                                                                                                                                                                                                             (princing and incentives policy,

                                                                                                                                                                                                                                                                (spare parts, maintenance…)

                                                                                                                                                                                                                                                                                                                         Insurance and warranties

                                                                                                                                                                                                                                                                                                                                                                                                                  Others (deposit banking,
                                                                                                                                                                                                                                   international growth)

                                                                                                                                                                                                                                                                                                  Financing / leasing

                                                                                                                                                                                                                                                                                                                                                    (fleet management)

                                                                                                                                                                                                                                     Sale of new cars

                                                                                                                                                                                                                                                                                                                                                       Other services

                                                                                                                                                                                                 cost cutting)


                                                                                                                                                                                                                                                                        After sales

                                                                                                    Service and spare
                                   Suppliers                                                            Car rental
                                     22%                                                                business

                                                                                                   Used car retailing
                              Source: Volk swagen, Automotive news, CSFB                                                    (*) Industry average 2003 Booz Allen Hamilton
                                                                                                                            Sources: Volkswagen, IXIS CIB

Spreads & Credits Autos                                                         5 December 2006                                                                                                                                                                                                                                                                                                                                  p.5
                            Later on we will question the interest of diversifying the activities offered by the CFCs, in
                            particular the retail banking activity typical among German CFCs, unlike French CFCs, which
                            do not offer this activity. In some cases, the extent of the diversification is even greater, as in
                            the case of mortgage loans offered by GMAC’s ResCap.

In Europe, three            2. Automobile financing: a growth driver for automakers
quarters of all vehicles    In Europe, only one car in four is purchased in cash, while three of four are supported by
are purchased using         1) financing, mainly in the form of traditional credit from either captive finance companies,
credit, while in the        banks or lending institutions, and 2) long-term leases. In the United States, automobile
United States the           financing plays an even greater role, since only 9% of purchases are settled in cash. It is
comparable figure is        therefore clear why financing is an essential sales tool for automakers.
above 90%
                            The chart on the lower left shows how in Europe, on average, 30%-31% of total vehicles sold
European CFCs finance       (including rental and fleet businesses) are financed by the manufacturer’s CFCs (i.e. nearly
30%-31% of the vehicles     50% of all vehicles sold through non-cash purchases). In the United States, the penetration rate
sold. In the United         of CFCs is even higher, above 40%, given the importance of leasing (long-term rental with
States, the penetration     purchase agreement), a more common purchasing method than in Europe (with the exception
rates exceed 40%            of Germany and the Netherlands) and one in which CFCs face little competition from banks.

                           Penetration rate of CFCs in Europe
                                                                                            Penetration rate of CFCs in the US
                           (volume financed / volume sold)

                              35%                                                            50%


                              27%                                                            35%

                                         2001         2002       2003    2004        2005    30%
                                          Banque PSA Finance            RCI Banque                       2001          2002       2003        2004        2005
                                          VW Fin Serv                   BMW Fin Serv                 GMAC (US)                           Ford Motor Credit (US)
                                          DCX Fin Serv                  Fidis retail                 Chrys ler worldwide)                Big 3 weighted average (US)
                                          Weighted avg                                               BMW FS (US)
                            Sources: annual reports, companies                              Sources: annual reports, companies

CFCs support and            Financial services make a significant contribution to the growth of the automobile manufacturers
promote the carmaker’s      in terms of both revenues and unit sales. Indeed, the financing business can have a multi-fold
revenues and unit sales     impact on an automaker’s unit sales:
                                     •       by adjusting the interest rate, CFCs may attract more buyers or, at the very least,
                                             prevent sales from collapsing. GM’s 0% financing in October 2001 to ward off a plunge
                                             in the US market is the most extreme example;
                                     •       CFCs may also facilitate and promote sales by loosening the credit scoring, which
                                             generally results in a higher penetration rate. In that case, the difficulty lies in striking
                                             the right balance between the penetration rate and the cost of risks;
                                     •       through CFCs, automakers may promote the sale of a new vehicle by offering higher
                                             value to the used vehicle taken in exchange for the sale of a new one, as the CFCs
                                             can also make money by financing the used vehicle when the carmaker will resale it;
                                     •       buyers who obtain financing through the manufacturer tend to buy new cars more
                                             frequently. Such is especially the case with retail balloon or leasing contracts.
Customers purchasing                         Volkswagen estimates that in Europe, a buyer using a retail balloon contract buys a
vehicles through credit                      new car on average every 35 months, whereas the buyer who pays cash changes cars
renew their cars more                        on average every 66 months. This type of financing therefore provides automaker’s
frequently                                   with higher sales turnover and also a robust market for used vehicle sales, which is
                                             generally profitable albeit with some risk (mainly on residual values). Similarly,
                                             DaimlerChrysler estimates that a buyer who pays cash averages two car purchases
                                             every 10 years, compared with four purchases every 10 years for one using captive

   p.6                                                           5 December 2006                                                 Spreads & Credits Autos
                                 •   in emerging market countries, financing is a good means for automakers to capture
                                     market share. Indeed, few people in those countries have the means to pay cash for a
                                     new vehicle, as the price typically exceeds the savings of the average household.
 CFCs are also a means
                                     However, the monthly payment attached to a loan is more likely to be in line with the
 of gaining market share
                                     average monthly income. This explains the rush by automakers to obtain authorisation
 in emerging markets
                                     from the Chinese banking regulatory commission to establish captive finance

                             The act of financing a vehicle also enables a manufacturer to increase the average revenues
                             per unit sold, because buyers tend to focus mainly on their monthly payment. They will
                             therefore be more willing to move up to a higher-grade car or accept a higher price for the
 Customers who use           vehicle as long as the monthly payment remains within their budget, even if it means
 financing also spend        lengthening the term of the loan:
 more (in particular, they
                                 •   the buyers will thus be more willing to accept options on the vehicles than if they pay
 purchase more options)
                                     cash. This phenomenon is quite lucrative for automakers, since the options are
                                     generally very profitable;
 Packages enable                 •   automakers are increasingly offering packages that include, along with financing,
 automakers to                       related services such as insurance (see below), extended warranties, maintenance
 differentiate themselves            and roadside assistance. These offers are especially attractive for the CFCs, which
 from banks while                    can: 1) set themselves apart from banks by offering a service that the banks cannot
 improving their                     match, and 2) generate strong profitability, as customers cannot break down the
 profitability                       package price between the vehicle and services, while the cost of the services is low.

                             The specific case of insurance. The example of Volkswagen FS AG

                             In their packages, automobile manufacturers also offer vehicle and/or loan insurance. While
                             banks may do the same, manufacturers have an advantage in that they can offer the buyer a
                             full range of services under one roof, with everything included in the monthly payment. By
                             offering insurance policies, the manufacturers may also cover other interests, as evidenced in
                             the case of VW.
 The customised
 insurance policies          For customers financing automobile purchases through Volkswagen Financial Services AG, the
 included in VW’s            company offers packages that include customised insurance policies. The premiums take into
 packages make it            account: 1) the buyer’s profile (according to the experience of VW, whose customers
 possible to establish a     statistically have fewer accidents than the average); 2) the degree of complexity of repairs on
 virtuous circle between     the car sold; and 3) safety systems that the buyer has taken as options (e.g. a buyer of a Polo
 the CFCs and the            who takes the optional Electronic Stabilisation Programme (ESP) would pay a lower premium,
 automakers by               which makes the purchase of the option more affordable). Moreover, the insurance policy
 promoting, for example,     mandates that repairs be performed through the dealership network, which ensures additional
 the sale of safety          revenues for the manufacturer (sales of high-margin spare parts). This also gives
 features and requiring      manufacturers greater assurance as to the quality of the used vehicles that they may be buying
 that repairs be made        back (lease back or trade-in on a used vehicle as part of a new vehicle purchase), since they
 through the dealership      are the ones performing the maintenance and repairs. That leads to greater residual value.
                             Overall, the growth in the downstream businesses along the automakers’ value-added chain
                             (relative to their core manufacturing business) allows the manufacturers to offer more
                             comprehensive packages and render the overall sales price less transparent (thereby
                             generating higher margins). Thus a real dynamic exists between the manufacturer and its CFC.

                             In return, the CFC is the preferred or even exclusive counterpart of the carmaker as far as
                             financing is concerned and benefits in some cases from subsidized transactions (such as zero-
                             interest loans) which significantly increase its loan volume.

                             Ford clearly summarised the interaction between the automobile manufacturer and the captive
                             finance company in the chart below, to which we have added a few more details.

Spreads & Credits Autos                            5 December 2006                                                      p.7
                           Strategic interaction between the automobile manufacturer and its captive finance

                                                                                           Trusted brand
                                                                                           Access to dealer channel
                                                                                           Exclusives marketing programs (0%)

                                                        Proposes                              Incremental
                                                        good cars                            vehicle sales
                                                                                                               Captive finance

                                  Supports vehicle sales (faster turnover rate)
                                  Customers buy more options
                                  Higher customer satisfaction and loyalty
                                  Dealer and emerging market support
                                  Profits and dividends

                           Sources: Ford Motor Company and Getty Images

CFCs are an essential       Given these factors, it is clear that captive finance companies are an essential sales tool for
sales tool for carmakers    manufacturers in terms of revenues, unit sales and profit margins. But captive finance
                            companies offer yet another major advantage to the manufacturers, namely increased customer

                            3. Customers financed by the CFC are more loyal to the
                            Previously, we saw that captive financing went hand in hand with more frequent vehicle
                            purchases by a given customer. Naturally, manufacturers want to ensure that the customers
                            remain loyal to their brand. Here again, CFCs help to foster customer loyalty, as evidenced in
                            the two charts below.

                           Loyalty to VW brands                                   Loyalty to Ford brands
                            75%                                                   80%



                             0%                                                    0%
                                           Germ any              USA                         Europe            USA         UAS (leasing)
                               FS captive customers   Non-FS captive customers        FS captive customers      Non-FS captive customers
                            Source: Volkswagen                                    Source: Ford Motor Credit

                            Not all manufacturers quantify the increased brand loyalty resulting from internal financing as
                            precisely. However, the methods by which CFCs operate normally ensure this heightened

                            Indeed, automobile manufacturers do not receive a great deal of information about their

   p.8                                                5 December 2006                                         Spreads & Credits Autos
 Customers who finance      customers directly. The dealership network receives more, but this network is generally not
 their purchases via        owned by the manufacturer (at least in its entirety). Moreover, the dealership network’s
 CFCs are also more         information is not always up to date. On the other hand, the CFCs have very detailed customer
 loyal to the automobile    information, which by definition is regularly updated over the life of the loan.
 manufacturer. This is
                            This customer database, which is owned by the CFC, is thus an extremely valuable source of
 due to the fact that the
                            information. For example, it enables the companies to contact clients whose financing is on the
 automakers maintain
                            verge of ending in a few weeks or months to encourage them to replace their vehicles. That
 regular contact with the
                            occurs automatically in the case of retail balloon and leasing loans, since the customer may
 customers, and can
                            return the vehicle at the end of the loan term. But the company can also contact customers with
 easily offer them a new
                            traditional loans in this manner. The database also makes it possible to inform customers with
 vehicle at the end of
                            respect to the Group’s new products, perhaps even offer them a sneak preview. Thus the CFCs
 their loan and/or on the
                            may be directly involved in the rollout of a new vehicle model.
 occasion of a new
 model launch               The idea is to maintain the contact between the customer on the one hand and the brand or
                            dealership on the other. In that respect, vehicle maintenance also plays a role. As a general
                            rule, once a vehicle is no longer under warranty, customers have most of their vehicle
                            maintenance and repairs performed outside the dealership network (independent garages as
                            well as multi-brand centres such as Feu Vert, Norauto, Midas, Speedy, etc.). By including
                            maintenance in a package along with financing, automakers ensure that customers return
                            periodically and in this way can offer them new products.

                            For that reason, automakers systematically offer financing and overwhelmingly prefer buyers
                            who finance their purchases using credit as opposed to paying cash, as the latter are also more
                            inclined to demand rebates in the form of lower prices.

                            4. Advantages and disadvantages of diversification for
                               captive finance companies
                            While nearly all the captive finance companies share a common core business activity, they do
                            not all have the same business scope (see following table).
 With the exception of
 GMAC and, to a lesser      For example, the French CFCs, despite having the status of banks (see section 3), do not have
 extent, VW FS AG,          any commercial banking or credit card activities, unlike their German or US counterparts. They
 captive finance            have a very restrictive approach with respect to their role and do not seek to go beyond their
 companies tend to have     scope of activities, which is to provide direct support to the manufacturer’s automobile sales.
 relatively similar
                            Other CFCs have narrowed the scope of their activities. For example, Ford Motor Credit, which
 business scopes.
                            at the end of the 1990s sought to be a major services provider, had added certain business
                            segments such as financing for used vehicles and competing brands. It even reached a joint
                            venture agreement with a bank to begin underwriting mortgage loans. Since then, FMC has
 Ford Motor Credit and
                            backtracked and is now concentrating on pure automobile financing, as illustrated by the
 DaimlerChrysler FS
                            disposal of Hertz by Ford in September 2005.
 have refocused on a
 smaller number of          It is also interesting to note that shortly after Ford’s disposal of Hertz, Volkswagen decided to
 activities more directly   sell Europcar, its profitable short-term car rental business, which was a part of the financial
 centred on automobile      services division. Meanwhile, VW’s acquisition of a 50% stake in LeasePlan (European leader
 financing                  of long-term rental and fleet management for companies) is considered strategic because that
                            company is better able to overcome the challenges faced by the automaker (the product mix is
                            higher than for short-term rentals, competition is less fierce and the customer relationship is
                            more in-depth, especially with respect to fleet management).

                            Similarly, DaimlerChrysler Financial Services either discontinued or sold several of its non-auto
                            activities such as Debis Air Finance (one of the first five companies worldwide specialising in
                            aircraft leasing) and real estate financing. Toll Collect, the German consortium that manages
                            the electronic toll system for trucks and in which DaimlerChrysler has a 45% interest, would
                            appear to be the exception.

Spreads & Credits Autos                           5 December 2006                                                        p.9
                            Activities of various captive finance companies
                                                                     GMAC           FMC          DCX FS        VW FS AG      BMW FS      RCI Banque Bque PSA Fi Fidis Retail
                            Classic loan                                x             x             x                x            x            x            x             x
                            Retail balloon                              x             x             x                x            x            x            x             x
                            Leasing                                     x             x             x                x            x            x            x             x
                            Dealer financing                            x             x             x                x            x            x            x
                            Insurance                                   x             x             x                x            x            x            x             x
                            Maintenance / assistance                    x             x             x                x            x            x            x             x
                            Fleet management                            x             x             x                x            x            x            x             x
                            Banking activities (*)                      x             x             x                x            x
                            Bank current account                                                                     x
                            Short term rental                                        Sold                           Sold
                            Long term rental                            x             x             x                x            x            x            x
                            Consumer credit                             x                                                                      x                          x
                            Financing new cars from competitor                                                                                                            x
                            Financing other goods (aircrafts,…)         x                          Sold
                            Residential mortgage                        x
                            Commercial mortgage                         x                      Discontinued
                            Sources: carmakers FS = Financial Services - (*) retail banking, credit cards, investments. Do not imply a bank status

                              GMAC is probably the CFC that has taken the largest steps in terms of its diversification
                              strategy, mainly with its mortgage business, now consolidated under Residential Capital Corp
                              (ResCap). This activity, initially acquired in the mid-1980s, was later expanded through organic
                              growth. By 2005, it accounted for nearly half of GMAC’s net profit and 40% of its assets, up
                              from 20% and 12%, respectively, in 2000. In fact, ResCap’s growth largely sustained GMAC’s
                              net profit in 2005 even as the earnings contribution from the automobile financing business was
                              falling off dramatically as GM’s vehicle sales plummeted and borrowing costs increased.

                            GMAC – net profit by business line ($ m)                                      GMAC – assets by business line ($bn)
                                3,000                                                                         350

                                2,500                                                                         300
                                      2000           2001   2002      2003        2004      2005
                                                                                                                2000       2001        2002          2003       2004      2005
                                      Financing              Mortgage               Ins urance                      Financing             Mortgage                Ins urance
                              Source: General Motors                                                      Source: General Motors

                              GMAC’s ability to withstand GM’s difficulties thanks to the earnings contribution from the
                              mortgage business clearly illustrates that CFCs may reduce their excessive reliance on the
                              manufacturer’s activities by diversifying the scope of their own business activities.
GMAC’s mortgage
                              Nevertheless, GMAC is clearly an exception. Why haven’t the other CFCs emulated GMAC?
business, which gives it
diversification and most      One may legitimately ask why CFCs don’t extend the competencies that they have acquired to
recently stable earnings,     other business lines and thereby capitalise on their customer knowledge and funding
requires a particular         capacities.
expertise that GMAC
                              CFCs cannot single-handedly decide to diversify their revenue streams, given the close
gained through an
                              relationships they maintain with the automobile manufacturers. Therefore the manufacturers
                              must also perceive that such diversification is in their interests. As we have seen, the
                              diversification of the CFCs’ competencies toward ancillary businesses (insurance, fleet
                              management, etc.) supports the automobile manufacturers’ growth.

                              But what about ancillary businesses such as mortgage, credit cards or even retail banking?
                              Even though a manufacturer may not be categorically opposed to extending the range of the
                              CFC’s activities, especially if these activities are close to the CFC’s core business, it will
                              nevertheless pay close attention to the CFC’s ability to pay dividends. Indeed, CFCs as a group
                              currently have very satisfactory profitability, with close on 14.5% ROE ensuring ample dividend
                              payments. At that point, the incentive to allocate equity to a CFC’s new business activities and
                              take the risk of weighing on its present profitability (increased risks, greater earnings volatility

   p.10                                                           5 December 2006                                                           Spreads & Credits Autos
 But an automobile           and, especially in the first years, profit margins below 15%) appears limited. Therefore, as long
 manufacturer may be         as the CFCs serve as cash cows for the automobile manufacturers and that growth potential
 reluctant to see its        remains by replicating the business model toward high-growth regions, the diversification
 captive finance             strategy does not appear essential.
 company rush into new
                             Expertise is another key issue. As long as the CFCs diversify into business areas in which they
 activities that, in some
                             already have expertise, they do not have to invest too heavily. On the other hand, developing
 cases, are far removed
                             an activity such as mortgage also requires a specific competency. To avoid pitfalls, this growth
 from its area of
                             should probably come through acquisitions. But there are few potential targets in the various
 expertise because such
                             business segments where CFCs might position themselves.
 a move could weigh, at
 least temporarily, on       Along with that obstacle comes the notion of mature markets. We noted previously that even
 this subsidiary’s           though French CFCs have the status of banks, they have elected not to develop retail banking
 profitability or even       activities, in contrast to their German counterparts. That decision may be explained by the full
 jeopardise ability of the   maturity of the French retail banking sector, which leaves little room for an undersized CFC to
 CFC to pay dividends to     go up against the banking giants that have the benefit of customer loyalty. The situation is
 the carmaker                different in Germany, where the retail banking market is fragmented, with little profitability and
                             still offering potential.

                             Overall, the risk/return ratio associated with a diversification of competencies does not provide
 Moreover, the maturity
                             the other CFCs with an incentive to follow GMAC’s example. However, if the CFC’s organic
 of the new targeted
                             growth were to dry up and/or if it had to compete more against banks and thereby generate
 activity must also be
                             insufficient margins, then the issue of diversification – notably toward business segments
 taken into consideration
                             ancillary to the core business – could once again be put on the front burner.

                             Conclusion: an automobile manufacturer needs a captive finance company

                             Clearly, automobile financing is a key link in the value-added chain of the automobile business.
                             The CFC is thus integrated into the manufacturer’s commercial and marketing strategy in both
                             mature and emerging markets, where the CFC supports the manufacturer when the
                             opportunities for penetrating the market meet the profitability and risk criteria. The primary
                             objective of the captive finance company, therefore, is to support the manufacturer’s unit sales
                             and revenues wherever in the world it makes sense, while managing the degree of risk in order
                             to ensure a certain profitability level and sufficient dividend payments to its parent company.
                             One may nevertheless ask if a car manufacturer needs to own 100% of the captive finance
                             company at a time when GM is preparing to take in $10 billion through the sale of a 51% stake
                             in GMAC that has now been completed. We will answer to this question in the following section.

Spreads & Credits Autos                            5 December 2006                                                        p.11
                           Does it make sense for an automaker to
                           wholly own its CFC?
With the exception of      With the exception of Fidis, in which Fiat now owns a 49% — soon to be 50% — stake, and
Fidis and GMAC, all the    GMAC, whose 51% sale to a consortium led by the Cerberus fund is now completed, all of the
CFCs are wholly owned      other captive finance companies are wholly owned by the respective automobile manufacturers.
by an automobile           But the mere fact that auto financing has a key role in the value-added chain is not sufficient to
manufacturer               explain this state of affairs. Indeed, logistics and components are also indispensable, yet
                           automobile manufacturers are perfectly content to outsource an increasingly large portion of
                           these activities. We can therefore legitimately ask whether it makes sense for an automaker to
                           remain a 100% owner of its CFC. We can also ask if the risks inherent in the financing business
                           are worthwhile.

                           1. A substantial and recurring earnings contribution
                           By definition, carmakers’ earnings are cyclical, especially with respect to the age of its vehicle
                           line. Moreover, in recent years, restructuring provisions and expenses have weighed heavily on
                           the profits of the industrial activities. Thus for the eight manufacturers in our peer group, the
                           sum of the profits excluding financial services amounted to a net loss of € 4.2bn in 2005,
                           compared with net profits of € 8.6bn in 2004 and € 2.8bn in 2003 (see lower left chart). The
                           fluctuations excluding financial services were therefore particularly strong, especially at GM,
                           Ford and DCX.
The CFC provides the       Conversely, the financial divisions have benefited from steady earnings growth, with the
manufacturer, whose        exception of GMAC and FMC in 2005, as they had to contend with higher funding costs
earnings are cyclical,     following the downgrade to junk. Finally, it should be noted that the sum of the net profits for the
with a growing,            captive finance companies of the eight manufacturers in our peer group increased from € 4.2bn
foreseeable and            in 2001 to € 7bn in 2005, representing 14% average annual growth.
recurring earnings
                           Not only are the net profits of the captive finance companies steadier, they are also easier to
                           predict. That is because the revenues generated in a given year come for a large portion from
                           loans made in the previous years (see lower right chart), with the yields and funding costs
                           known at the outset of the year. The cost of risk is the only unknown. In any event, it is
                           reasonable to assume that manufacturers can predict 70% of the result of its CFC of a given
                           year at the beginning of the year.

                          Combined net profits of GM, Ford, DCX,                               2005 revenues may be tied to loans issued
                          VW, BMW, Renault, PSA, Fiat (€m)                                     as early as 2001
                                                                                                                                               2005 revenues
                           8,000                                                                   2001 originations
                           4,000                                                                              2002 originations
                                 0                                                                                         2003 originations
                                                                                                                               2004 originations
                                          2001        2002          2003    2004       2005
                                                                                                                                     2005 originations
                                               Financial Services          Rest of the group
                          So urces: annual repo rts                                            Source: Ford Motor Credit

                           Aside from the fact that they are steadier and more foreseeable, net profits from captive finance
                           companies also account for a growing share of the manufacturers’ earnings, even when the
                           earnings contribution from the industrial activities remains essentially steady. That situation was
                           clearly evident at BMW, where the net profit from financial services activities increased from
                           € 250m in 2001 to around € 400m in 2005, a 12% annual average increase. The relative share
                           of the earnings contribution from CF companies to total group net earnings thus rose from 14%
                           in 2001 to 18% in 2005 (see lower left chart in the following page).

  p.12                                                         5 December 2006                                                        Spreads & Credits Autos
                          Net profit of BMW’s financial services (in                                                     Net profit of Banque PSA Finance (in €m
                          €m and as a % of group total)                                                                  and as a % to PSA group total)
                          400                                                                                      20%   400                                                                              40%
                          300                                                                                            300                                                                              30%
                          200                                                                                      15%   200                                                                              20%
                          100                                                                                            100                                                                              10%
                              0                                                                                    10%      0                                                                             0%
                                      2001            2002            2003           2004             2005                          2001            2002         2003          2004           2005

                                                  NP * (€m )                   Fin Serv as a % of total (rhs )                                 NP (€m)               Fin Serv as a % of total (rhs)
                          (*) B M W co m m unicates o nly P B T result fo r FS. We applied a 35% tax rate
                          So urces: B M W's annual repo rts, IXIS CIB estim ates                                         So urces: P SA 's annual repo rts

                          This trend applies even more to full-line automobile manufacturers. By way of example, the net
                          profit of Banque PSA Finance increased by 26% per annum over the past five years, from
                          € 159m in 2001 to € 400m in 2005. Last year, it represented 39% of PSA Group’s net profit,
 In some years, a         compared with less than 10% in 2001. In the case of PSA, this increased earnings contribution
 manufacturer’s entire    can be attributed both to the steady earnings growth at Banque PSA Finance as well as the
 net profit may be        deterioration in the earnings of the Group’s industrial activities.
 contributed by its CFC
                          In extreme cases, in some years all of a manufacturer’s earnings may be generated by its
                          captive finance company, while the industrial activity only breaks even or posts a loss. Such was
                          the case last year at Ford, which recorded a group net profit of only $ 2bn despite Ford Motor
                          Credit’s $ 2.5bn earnings contribution, without even mentioning GM, which recorded a
                          substantial consolidated net loss despite ample profits provided by GMAC.

                          With its recurring and increasingly vital earnings contributions at the group level, the financing
                          business offers automobile manufacturers considerable downside protection. They therefore
 The CFC generates a
                          have every reason to wholly own their captive finance companies and take advantage of the
 generally high ROE
                          substantial, growing and generally recurring earnings.
 with limited invested
 capital                  Indeed, an automaker in good financial health has no incentive to share the earnings of its
                          captive finance company with a partner, especially since the capital invested in the business is
                          generally inconsequential when measured against the highly capital intensive industrial activity.
                          In addition, the net return generated by the capital of the captive finance companies is generally
                          higher (14.3% on average in 2005) and markedly less cyclical than that of the industrial

                          ROE of captive finance companies (%)                                                           ROE of captive finance companies (%)
                           25%                                                                                            20%





                             0%                                                                                             5%
                                      2001          2002           2003          2004          2005         9 mths 06                  2001             2002          2003             2004            2005

                          (*) NP excl Toll Collect and asset writedowns on Deb is Air Finance and Capital Services       (#) NP restated from Europcar for the 3 years and from LeasePlan in 2004 (only 2 months)
                          ROE = reported net profit / average equity                                                     ROE = reported net profit / average equity
                                                                                   GMAC                   Ford Credit    Sources: annual reports, IXIS CIB                     FIDIS                 VW FS AG (#)
                          Sources: annual reports, IXIS CIB
                                                                                 DCX FS (*)             BMW Fin Op                                                           RCI Banque           Bque PSA Fin

                           2. Ideal complementarity in terms of cash flow
                           In addition to the significant and recurring earnings contribution, CF companies also offer
                           manufacturers favourable complementarity in terms of cash flow. To simplify, one can
                           distinguish between two different phases.

                           The manufacturer is in a growth phase with rising unit sales. In that case, it is likely that
 When the manufacturer     the cash flows are themselves growing rapidly and that the manufacturer is generating positive

Spreads & Credits Autos                                                   5 December 2006                                                                                                                p.13
is in a growth phase, it      free cash flow. Meanwhile, unless the captive finance company wants to reduce its penetration
generates positive free       rate, it will also make a larger number of loans, exceeding the number of loans reaching
cash flow that may be         maturity. At that point, it will have substantial refinancing needs, or even require additional
used to finance the           capital.
growth of the CFC’s
                              Indeed, the CFC has no bank deposits (or very few excluding VW FS AG for which they
balance sheet
                              represent 22% of its funding), and while it may not be highly capital intensive, it does need
                              additional capital during expansionary periods marked by increased lending volume in order to
                              satisfy capital adequacy ratios. Thanks to the positive free cash flow from the industrial activity,
                              the manufacturer will be able to finance the growth of its captive finance company. Furthermore,
                              during these periods, it does not need the subsidiary to make substantial dividend payments.

                              BMW provides a good illustration of this situation, since a portion of the free cash flow from its
                              industrial activity is used by the CFC as a source of funding (mainly in the form of intra-group
                              loans, and rarely in the form of capital increases). The lower left chart shows that in 2001, even
                              as BMW was terminating its costly experience with Rover and recording slightly negative free
                              cash flow, the CFC lent it € 400m. In early 2002, however, BMW’s free cash flow began to
                              recover thanks to the strong growth in the company’s unit sales, and the manufacturer was able
                              to lend its CFC increasingly large sums, as much as € 3.5bn in 2005. The CFC thus benefits
                              from an additional source of refinancing, while the industrial business invests a portion of its
                              surplus cash internally in a core, strategic business.

                             Intra-group financing of BMW’s industrial                  FMC has sharply increased its dividend
                             activities toward the CFC (€m)                             payment to Ford since 2001 ($bn)

                                4,000                                                   4
                                                Internal financing                                          Pre-tax profit
                                                FCF incl proceed from disposal                              Dividends paid

                               -1,000                                                   0

                                               2001   2002    2003     2004      2005       1984    1988      1992     1996   2000   2004
                             So urce : B M W                                            Source: Ford Motor Credit

                              The manufacturer faces a steady and significant decline in unit sales. In that case, the free
                              cash flow from the industrial activity is very likely to be negative. But at the same time, the CFC
                              has fewer vehicles to finance, and in all likelihood the payments on previous loans exceed
When the                      those of the new loans granted.
manufacturer’s unit
                              For the past two years, that has been the case for GMAC and Ford Motor Credit, which have
sales contract and free
                              seen their loan volume diminish as a result of the eroding market shares of their respective
cash flow becomes
                              parent companies in the US market. In that situation, the captive finance company can either
negative, the reduction
                              reduce its debt load if it was too high or, if the debt load was normal, free up capital by paying
in the CFC’s assets
                              out dividends that may even exceed 100% of the net profit. In that case, the CFC’s dividend
enables it to free up
                              may offset, at least partially, the negative free cash flow generated by the industrial activity.
capital that it can pay to
the manufacturer in the       The history of Ford Motor Credit’s dividend payments to Ford is a good example. Over the past
form of substantial           22 years, FMC has paid out a total of $ 20.7bn on a combined profit before tax of $ 40.2bn, i.e.
dividends                     an average payout rate of 52% of pretax profit. But in the past five years, since Ford has fallen
                              on hard times, FMC has paid out $ 12.3bn in dividends on $ 14.8bn in pretax profit, i.e. an 83%
                              distribution rate (more than 100% of the net profit) without having to increase its debt ratio

                              However this does not mean carmakers can use with no limit the resources of their CFCs.
                              Indeed, the necessity to protect the rating of the CFC is a first protection, which reduces the risk
                              of an excessive use of the CFC’s cash. Furthermore, the bank status some CFC or their
                              affiliates have is a legal protection against such a risk (see page 23).

   p.14                                                      5 December 2006                                         Spreads & Credits Autos
                             The complementarity is therefore almost ideal between the industrial activity of the
                             manufacturer and its captive finance company during the critical periods in their respective
                             cycles. It is reassuring for the manufacturer (and its bondholders) to know that it can count on
                             the dividends from its CFC in phases when its industrial activity consumes cash. That is yet
                             another good reason to wholly own the CFC.

                             3. Are the risks inherent to captive finance companies
                             We have just considered two major advantages for a manufacturer to wholly own its captive
                             finance company in terms of recurring earnings and complementary cash flows. But is the
                             automobile financing activity completely risk-free? Are the potential risks inherent in the captive
                             finance company activities worth bearing?

                             To answer these questions, we first need to explain how the CFCs operate and the basic
                             principles of their profitability.

                                        a. Captive finance companies’ key factors of success

 A CFC must …                In the first part of this report, we examined the relationship between a manufacturer and its CFC
                             as well as the CFC’s mission, but it is also necessary to examine how CF companies operate.
                             To this end, we refer to last April’s “Credit University” presentation by Ford Motor Credit and
 … be selective in the       one of its diagrams.
 loans issued and
                             The CFC’s primary activity is to make loans consistent with its mission to support the
 measure its risk ….
                             manufacturer’s sales in a profitable manner. That of course requires that clients be carefully
                             selected thanks to a scoring system based on the captive finance company’s experience.

 …refinance its loans in     The CFC’s second activity involves refinancing its loans at the lowest possible cost. This cost
 the best possible           naturally depends on the CFC’s rating, liquidity and diversity of funding sources.
 conditions …
                             Finally, the third key factor in a CFC’s risk management, along with scoring, is the monitoring of
                             the loans and especially the management of delinquent loan payments and recoveries. This
                             management must be as responsive as possible while remaining flexible, since the goal is not
 .. and manage its
                             to break off the relationship at the first sign of trouble. Instead, companies need to contact the
 outstanding loans and
                             client quickly to understand the cause for the delinquent payment and the possible solutions to
 in particular the
                             the problem. Meanwhile, the CFC must control its operating costs and optimise its cost-to-
 delinquent loans
                             income ratio (see glossary).

                           Operations of a captive finance company                                                   Cost-to-income ratio (2005)


                                                                                          Service                      Banque PSA
                                                  Originate                               Operate efficiently
                                            Profitably support the sales                  Collect effectively            Finance
                                                 of the carmaker                     Management of doubtful
                                                Price the loan right                         receivables
                                            Proprietary scoring model               Efficiency and rapidity of the     RCI Banque
                                                                                      recovery management

                                                                         Funding                                       Avg of French
                                                                       Maintain liquidity                                 banks
                                                              Access to diverse funding sources
                                                                Borrowing cost effectiveness
                                                             Manage risks (interest rates, currency)                                   0%    10%      20%      30%      40%     50%      60%      70%

                                                                                                                     NB : S&P''s methodology for RCI and BPF is not comparab le with the one for GMAC
                                                                                                                     Sources: S&P, IXIS CIB
                           Sources: Ford Motor Credit and IXIS CIB

Spreads & Credits Autos                                                       5 December 2006                                                                                                    p.15
                                        b. What are the risks specific to a CFC? Do they really pose an
                                           additional threat to the manufacturer?

                            The business lines and activities of captive finance companies certainly have inherent risks that
                            we will analyse in this section, namely delinquent loan payments, liquidity and interest rate risk.
                            We will see, however, that none of these risks is likely to lead to substantial deterioration, and
                            that they do not pose an additional threat to the manufacturer.

                            Client default risk

                            Above, we saw the importance of scoring and debt recovery management with respect to the
                            CFC’s risk management. A tight management of these two factors allows generating a low loss
                            ratio (see glossary). For instance, Banque PSA Finance, probably the benchmark as far as loss
                            ratio management is concerned, should deliver in 2006 a loss ratio below 0.5% of its average
                            net loans for the tenth year in a row (see lower left chart).

                           Banque PSA Finance – loss ratio as a % of                                                                            RCI Banque – loss ratio as a % of the
                           its average net receivables                                                                                          average receivables

                           0.50%                                                                                                                  0.75%


                                            2000              2001              2002              2003            2004 (*)        05 IFRS (#)     0.00%
                                       Los s ratio - Total                Los s ratio - Retail                 Los s ratio - Wholes ale                      1996      1997     1998     1999   2000    2001    2002     2003   2004    05
                           (*) Excluding a change in acco unting m etho d, the to tal lo ss ratio wo uld have been 0.45%                                Los s ratio - Total              Los s ratio - Retail          Los s ratio - Wholes ale
                           (# ) Excluding so m e fine tuning in pro vsio nning po licy, the to tal lo ss ratio wo uld have been 0.24%
                           So urces: B anque P SA F inance annual repo rts
                                                                                                                                                So urces: RC I B anque annual repo rts

                            Is there a danger of significant deterioration in these areas that could pose an additional risk for
                            the manufacturer?

                            Theoretically, various factors could increase the default risk for clients of a CFC:
The uncertainties
specific to the CF                      •           A pronounced economic downturn. Although the CFC’s activity is not cyclical, it is
companies do not seem                               nevertheless dependent on the overall economy and anything that might affect the
to cause any                                        clients’ ability to repay their loans, starting with unemployment. Any deterioration in the
deterioration in the                                macro-economic indicators, however, will probably have a much greater negative
manufacturer’s risk                                 impact on the manufacturer’s activity than on that of the CFC. The additional risk from
exposure.                                           the CFC is therefore considered negligible;

                                        •           Less strict scoring criteria in order to increase the volume of approved loans. That
                                                    situation could arise if the manufacturer insisted that its captive finance company set
Indeed, either these
                                                    more ambitious penetration rate targets. But these targets are set by the captive
uncertainties are
                                                    finance company, even though they are approved by the manufacturer. Moreover, the
limited, or they already
                                                    captive finance company is not obliged to approve a loan, even on behalf of the
exist at the
                                                    dealership network. Of course the captive finance company may decide to relax its
manufacturer’s level
                                                    scoring criteria on its own initiative, especially if its penetration rate and cost of risk are
                                                    low, as is the case for Banque PSA Finance. But that decision is normally made by
                                                    taking into account risk and return considerations. Nevertheless, in spite of these
                                                    rules, it would be illusory to think that the manufacturer never puts any pressure on its
                                                    captive finance company. One can easily imagine that this pressure would be
                                                    strongest during a recessionary period, as the manufacturer wants to limit any sales
A CFC is never obliged
                                                    decline by all possible means. That explains, at least in part, why Ford Motor Credit
to grant a loan, even to
                                                    recorded its first quarterly loss ever in 42 years during the fourth quarter of 2001 (the
the dealership network
                                                    $ 297m loss followed a profit of $ 410m in the fourth quarter of 2000), as the company
                                                    adopted a more aggressive lending strategy with respect to less qualified clients than

   p.16                                                                               5 December 2006                                                                                            Spreads & Credits Autos
                                                  before. The same was true for Mitsubishi Motors’ U.S. financing business in the first
                                                  half of 2003. However, these exceptional cases are more indicative of the
                                                  manufacturers' difficulties and their strategic decisions to impose an additional risk on
                                                  their captive finance companies. Moreover, the deterioration in Ford Motor Credit’s risk
                                                  exposure was temporary (see lower left chart). In the vast majority of cases,
                                                  manufacturers – even those in a tough situation – have a vested interest in
                                                  maintaining the profitability of their captive finance companies, as illustrated by the
                                                  resistance of GMAC’s earnings (see lower right chart);

                              Pre-tax profit of Ford’s industrial/financial                                          Net profit of GM’s industrial activities vs.
                              activities                                                                             GMAC net profit
                                8      $ bn
                                                                                                                        4   $ bn                                                                         3%
                                6                                                                            0.4%       3
                                4                                                                                       2
                                                                                                             0.2%       1                                                                                1%
                                0                                                                                       0                                                                                0%
                               -2                                                                                      -1
                                                                                                             -0.2%     -2                                                                                -1%
                               -6                                                                                      -3                                                                                -2%
                               -8                                                                                      -4
                              -10                                                                            -0.6%     -5
                                       2000         2001        2002        2003         2004        2005              -6                                                               -13 M d$         -4%
                                              PBT - ind activities                        PBT - Fin Serv                       2000        2001         2002         2003        2004         2005
                                              Doubtful loans (*)                                                             NP - ind activities              RN - GMAC                Doubtful loans (*)
                              (*) Over-60-day delinquencies as a percent o f the end o f perio d acco unts           (*) Over-30-day delinquencies as % o f retail co ntracts (excl acco unts in bankruptcy)
                              o utstanding fo r no n-bankrupt acco unts - So urce: Fo rd                             So urce: GM

                                        •         Subsidised and even zero-interest loans should theoretically weigh on the CFC’s
                                                  earnings given 1) the negative net interest margin and 2) the greater number of loans
                                                  issued, which could result in a deterioration of the average risk exposure of the loans.
                                                  Actually, these loans do not present a specific risk for the captive finance company.
                                                  Since the initiative for the subsidised loan typically comes from the manufacturer,
 The cost of zero-interest
                                                  which uses it as a marketing tool, the burden of the subsidy (spread between the
 loans is borne by the
                                                  normal loan rate and the actual loan rate offered to clients) resides with the industrial
 industrial activity of the
                                                  activity of the manufacturer. To be sure, the cost is high for manufacturers, but the
 carmaker if the latter
                                                  decision is theirs to make.
 takes the initiative for
 the promotional offer                            The industrial division records the loan subsidy as an expense on its income
                                                  statement, generally as a one-off expense at the time of the sale. Meanwhile, the cash
                                                  outflow occurs in a monthly instalment on top of the instalment payments made by the
                                                  vehicle purchaser. In the case of GM and Ford, the two manufacturers that rely the
                                                  most on subsidised loans, the net interest margin payments from the manufacturer to
                                                  the captive finance company may be as much as several billion dollars per year (more
                                                  than $ 4bn for Ford in 2005, and at least as much for GM). That also means that the
                                                  CFC records a receivable from the manufacturer for all payments due on loans
                                                  outstanding after December 31.

                                                  This policy of heavily subsidised or zero-interest loans has also led to a net increase in
                                                  new lending volume and market penetration by the US captive finance companies.
                                                  One might imagine that this greater market penetration has been accompanied by a
                                                  deterioration in the average credit quality of the loans. As evidenced by the FMC and
                                                  GMAC delinquencies figures in the above charts, however, this supposition is not
 We do not believe that                           automatically correct. Indeed, the manufacturers may restrict their promotional offer
 the bankruptcy of a                              based on certain eligibility criteria;
 manufacturer                           •         Increase in delinquent payments by clients in the event of bankruptcy by the
 automatically results in                         manufacturer. It is logical to ask whether a bankruptcy by the automobile
 an increased                                     manufacturer would result in a surge of delinquent payments by vehicle owners to the
 delinquency rate among                           CFC that originated the loan. First, it is worth remembering that a manufacturer’s
 retail clients who                               bankruptcy does not extinguish the debt of the individuals who purchased the vehicles
 purchased their vehicles                         on credit. They are still required to repay the loans. Moreover, their default risk is not
 on credit.                                       correlated to that of the manufacturer and therefore has no reason to increase. On the

Spreads & Credits Autos                                                     5 December 2006                                                                                                              p.17
                                                      other hand, it is very likely that the residual value of the vehicles would plummet, which
                                                      creates the risk of loss relative to the value booked on the balance sheet. This loss
However, the residual
                                                      could materialise either because of successive delinquent payments resulting in the
value of the
                                                      vehicle being repossessed, or through a normal lease back when the purchase option
repossessed vehicles
                                                      is not exercised. It should be noted, however, that the risk originates with the
may be below
                                                      manufacturer’s default and may weigh on the CFC, not the other way around. It is also
                                                      interesting to note that the residual value risk is not always borne by the CFC but in
                                                      some cases (as with RCI Banque, Banque PSA Finance and VW FS AG) by the
                                                      manufacturer or even the dealership network;

                                          •           Increase in dealership delinquent payments in the event of a bankruptcy by the
                                                      manufacturer. The risk that such a bankruptcy would endanger the financial health of
                                                      the dealership network is much greater, especially if it is a single-line (or mono-group)
                                                      dealership network, which is usually the case in Europe. Once again, however, it
                                                      should be noted that this risk would not run from the CFC to the manufacturer, but the
                                                      other way round.

                              Funding needs and liquidity risk

                              The CFC’s funding needs are far greater than those of the manufacturer for its industrial
                              activities. The very nature of its business requires it to refinance constantly. The CFC must
The CFC must retain           therefore be in a position to fund its new loans under all circumstances, even as market
sufficient reserves (cash     conditions evolve. That requires:
and confirmed available
                                          •           1) substantial liquidity, either on the balance sheet or through available credit facilities.
credit lines) …
                                                      The rating agencies thus require that the available liquidity (confirmed and available
                                                      bilateral credit lines + credits eligible as collateral with the central banks + cash) cover
                                                      at least the very short-term debt (especially commercial paper);
…and diversify its
refinancing sources                       •           2) well-diversified sources of funding so as not to depend on any single source. This
                                                      last point is particularly important in the case of a CFC whose rating has deteriorated.

                            Funding structure (2005 vs. 2001)                                                  GMAC funding evolution from 2001 to 2005

                                  90%                                                                             90%
                                                                                                                                                                Off-balance sheet
                                  80%                                                                             80%
                                                                                              Other                                                             Customer deposits
                                  70%                                                                             70%
                                  60%                                                         loan                                                              Bank loans and other
                                  50%                                                         Securitization
                                                                                                                  50%                                           Secured financings
                                  40%                                                         Customer
                                                                                              deposits            40%
                                  30%                                                                                                                           Retail debt programs
                                                                                              Debt (banks +
                                                                                              bonds)              30%
                                                                                                                                                                Institutional term debt

                                    0%                                                                            10%                                           Commercial paper
                                              2001      2005   2001     2005   2001    2005
                                                RCI Banque      Bque PSA Fin     VW FS AG                                   2001   2002   2003    2004   2005
                            Sources: annual reports
                                                                                                               Sources: 10K GMAC

                              The cases of GMAC and FMC clearly illustrate the fact that a CFC, even in dire straits from a
                              ratings standpoint, is able to meet its commitments while continuing to pay a dividend to the
                              parent company. The use of securitisation, a growing trend even among healthy CF companies,
                              has been applied even more extensively by GMAC and FMC to the extent where it now
                              represents more than half their financing (ABS, ABCP), compared with 16% in 2001 in the case
Even a CFC with a
                              of GMAC. According to S&P, while the overall ABS market in the United States grew by 39%
speculative grade credit
                              between 2004 and 2005 (from $ 74bn to $ 102bn), the auto component of this market increased
rating may limit its
                              by 75% to reach $ 33bn. This increase was driven mainly by FMC, whose ABS issues
refinancing costs in the
                              increased by 150% in one year (from $ 10bn to $ 25bn). This could have posed a subordination
short term through
                              problem for the unsecured debt.
securitisation …
                              Admittedly, securitisation offers CF companies whose credit ratings have been downgraded to
                              junk the opportunity to finance at much more favourable rates than on the bond markets, as
                              evidenced by the example of Ford Motor Credit (lower right chart).

  p.18                                                                  5 December 2006                                                          Spreads & Credits Autos
                                                                                                                             The ABS market has little sensitivity to the
                            FMC’s financing trends
                                                                                                                             rating – the FMC example
                              100%                                                                                                700
                                                                                                    Total securitized off-                    Spreads in bps
                                                                                                    balance sheet funding         600
                               80%                                                                  Asset-backed long

                                                                                                    Unsecured long term
                                                                                                    Other short-term debt
                               40%                                                                                                200

                                                                                                    Commercial paper -            100
                               20%                                                                                                      0
                                                                                                    Floating rate demand













                                                                                                                                             l- 0

                                                                                                                                                                    l- 0

                                                                                                                                                                                           l- 0

                                                                                                                                                                                                                   l- 0

                                                                                                                                                                                                                                           l- 0





























                                         2001         2002         2003      2004        2005       commercial paper                                                                                     Uns ecured debt funding
                            Sources: 10K FMC                                                                                 So urce: Fo rd M o to r C redit                                             Securitized funding

                             Securitisation is not used exclusively by CF companies in trouble. Indeed, it is interesting to
                             note that PSA recently broke new ground by taking advantage of the opportunity opened up by
                             a change in the French law to sell future claims through the securitisation of the bulk of its lease
                             contracts (the option to buy the car is included in the securitisation). The transaction total was
                             € 1.25bn.
 …or “whole loan sales”
                             In another case of diversifying funding sources, GMAC concluded major “whole loan sales”
                             agreements with Bank of America and Nova Scotia totalling $ 59bn, whereby GMAC merely
                             originates the loan and then transfers it immediately to the partner bank, which ensures its
                             refinancing. Naturally the CFC loses the net interest margin under this arrangement, but at least
                             it continues to ensure the financing of the manufacturer’s vehicles at competitive rates.

                             Moreover, while having ample liquidity provides a cushion for the CFC, in order not to be too
                             dependent upon the market in the short term, over the long term it should be noted that a
                             captive finance company has relatively well-matched assets and liabilities, since 1) it
                             immediately refinances the loans issued, and 2) it generally matches up the maturities of the
                             debts issued with those of the loans to be refinanced. That means that regardless of the
                             maturity, the receivables repaid to the CFC are usually at least as great as the debt to be repaid
                             by the CFC. The two charts below show the asset/liability balances of GMAC and FMC.

                            GMAC’s asset/liability match                                                                     FMC’s asset/liability match

                               140                                                                                              120

                               120                                                                                              100

                                20                                                                                                20

                                  0                                                                                                 0
                                         < 3 m ths         < 6 m ths        < 1year        < 2 years       < 3 years                          < 3 m ths             < 6 m ths              < 1year                < 2 years                Total
                            NB : o n balance sheet assets and liabilities                                                    N B : o n balance sheet assets and liabilities
                            (*) including cash and cash equivalent                  Interes t earning as s ets (*)           (*) including cash and cash equivalent                                   Interes t earning as s ets (*)
                            So urce: GM A C                                         Interes t bearing liabilities            So urce: Fo rd M o to r C redit                                          Interes t bearing liabilities

                             Interest rate risk

                             Captive finance companies have the reputation of being sensitive to changes in interest rates,
                             given the nature of the business. In fact, the immediate interest rate risk is low given that nearly
                             all of their loans to clients are made at fixed rates. Moreover, if the CFC chooses to refinance at
                             a variable rate (whether the debt is issued at a variable rate at the outset or part of a swap from
                             fixed to variable rate), it will also change the loans to a variable rate in order to offset the
 The actual interest rate
                             asset/liability risk. CF companies perform very frequent sensitivity calculations (on a daily basis
 sensitivity of CFCs to
                             for some companies such as RCI), especially asset/liability sensitivity. Any risks are
 interest rate risks is
                             systematically hedged. Some CF companies try as far as possible to neutralise the effects of
 relatively weak
                             interest rate changes on their operating margin by using the appropriate financial instruments to

Spreads & Credits Autos                                                     5 December 2006                                                                                                                                                        p.19
                            ensure the effective matching up of interest rates for assets and liabilities.

                            Thus at end-2005, RCI Banque reported that its interest rate sensitivity was € 2.5m for each
                            100 bp change in interest rates, and that at no time during the year did the sensitivity reach the
                            maximum limit of € 13m set by the company. Ford Motor Credit, meanwhile, reported that a
                            sudden 100 bp increase in interest rates (assuming no yield curve distortion) would negatively
                            affect its net profit by approximately $ 100m.

                            To be sure, the automobile market is not inelastic to interest rate changes, and if rates were to
                            reach unusually high levels, automobile financing could become less attractive for clients.
                            Nevertheless, reasonable interest rate variations can be passed on to them. Of course since CF
                            companies tend to lag behind the credit markets in implementing rate adjustments, the delay
                            could occasionally weigh on their profitability solely with respect to new loan issues.

                            It is also interesting to note that Banque PSA Finance purchased swaptions (interest rate swap
                            options) for the first three quarters of 2006 in order to ensure that its refinancing cost not
                            exceed a designated threshold for new loan issues in 2006.

                            4. Lessons to be drawn from Fiat/Fidis and GM/GMAC
                            In this second section, we have demonstrated that manufacturers have a vested interest in
                            wholly owning their CF companies and that the risks related to this activity are limited compared
                            to those of the carmaker. Yet Fiat and GM sold off majority stakes in their respective captive
                            finance companies. Why? Should we conclude that other manufacturers might follow their

                            Fiat and GM sell majority stakes in the CF companies

                            In March 2003, Fiat announced the sale of a 51% stake in Fidis Retail Italia (FRI) to a
                            consortium of four Italian banks for € 775m. This disposal contained a repurchase option that
                            Fiat is expected to exercise, since in July 2006 it announced that it would create Fiat Auto
Fiat sold 51% of Fidis in   Financial Services (FAFS), a joint venture with Crédit Agricole SA that would comprise all Fiat
March 2003 and GM           Auto financing activities, including those currently residing with FRI.
completed recently the
                            GM took the same step as Fiat, since it completed on November 30th the sale, announced as
sale of a 51% stake in
                            early as April 2006, of 51% in GMAC to a consortium led by the Cerberus fund for a total of
                            $ 14bn, of which $ 7.4bn paid by the consortium (the balance consisting of an extra dividend of
                            $2.7bn and transferred loans that will be securitised by GM for $4bn).

                            What led these two manufacturers to sell one of their most profitable assets? Was it because of
                            an urgent need for cash? Or is there another reason?

                            An urgent need for cash?

                            We do not believe that an urgent need for cash was the primary justification behind the sales of
                            Fidis and GMAC. Indeed, before selling off their CFCs, Fiat and GM had made other major
Many other assets had
been sold off by the two
manufacturers. The              •    Fiat sold its Toro insurance company in March 2003 for € 2.4bn and sold FiatAvio in
need for cash was                    April 2003 for € 1.6bn. Also, Fiat issued a € 3bn convertible loan in May 2002. While it
therefore not the                    is true that the group continued to consume cash at a rapid rate during this period, the
primary reason for                   need for liquidity does not strike us as the reason;
selling off majority
                                •    The same is true for GM, which sold its stake in Fuji Heavy in October 2005 for
stakes in the respective
                                     $ 725m, as well as a portion of its Suzuki shares in March 2006 for $ 2bn. In late 2003,
                                     GM had also sold off its Hughes Electronics division.

   p.20                                            5 December 2006                                     Spreads & Credits Autos
                             A CFC is only attractive when it has an investment grade rating

                             Fiat and GM decided to sell controlling interests in their CFCs in order to enable them to regain
                             their investment grade ratings (or a rating close to this category), and thus enjoy more
                             competitive refinancing costs. In our view, the fact that Fiat announced the beginning of the sale
                             process for Fidis Retail Italia (FRI) in March 2003, only three months after the first rating agency
                             downgraded it to speculative grade, illustrates this desire to maintain the credit rating of its

                             Indeed, we saw earlier that CFCs have several funding sources and that they can limit the
                             short-term impact of a speculative grade rating on refinancing costs through the use of ABS.
                             But if they want to remain competitive with respect to borrowing costs over the medium to long
                             term, CFCs must have an investment grade rating. After all, a CFC cannot depend too heavily
 These disposals were        on the ABS market, and some loans are difficult to securitize. During a conference call in late
 designed primarily to       2005, Ford explained that FMC could refinance without having to go to the bond market for two
 maintain the CFCs’          or even three years, but that beyond that time frame it needed access to that market.
 respective credit ratings
                             Fiat’s strategy met with success, because since March 2003, FRI has been rated three notches
 and enable them to
                             above Fiat by Moody’s and four notches higher by Fitch. This rating difference is due primarily
 return quickly to
                             to the majority presence among the shareholders (51%) of Italy’s four leading banks, which
 investment grade, and
                             ensure refinancing and would be able to provide support if needed, although no formal
 thereby enjoying
                             guarantee has been made in that respect. It should also be pointed out that these banks are
 competitive funding
                             fundamentally sound. This support, and to a lesser extent the intrinsic value of FRI, mitigated
 once again
                             the negative impact related to the fact that FRI’s volume depends on Fiat’s activities and
                             strategy. Thus FRI returned to an investment grade rating. The fact that Fiat will repurchase the
                             51% stake in FRI and contribute it to a 50/50 joint venture to be created with Crédit Agricole SA
                             (Fiat Auto Financial Services), which would include all Fiat Auto’s financing activities, does not
                             change the underlying principle. In fact, the improvement in the rating related to the
                             participation of a single partner (CASA), which also happens to be rated higher than the Italian
                             banks, should offset the fact that CASA will only own 50% of the joint venture and therefore not
                             have any incentive to provide FAFS with more support than would be provided by Fiat.

                             Similarly, we will see in the third section that GMAC’s rating and spreads benefited from GM’s
                             decision to sell a majority stake of its CFC to a strategic partner, which was first reported in
                             October 2005. In April 2006, GM made official its decision to sell off a 51% stake in GMAC to a
                             consortium led by the Cerberus fund and that also includes Citigroup and Aozora Bank. The
                             sale has been completed on November 30 .

                             Following the October 2005 announcement, the rating agencies carved out separate ratings for
                             GMAC and GM, the first remaining unchanged even as the second was being downgraded.
                             After the disposal has been completed, the three rating agencies increased further the gap by
                             upgrading GMAC to BB+ (only one notch below the investment grade category). The agencies
                             justify these distinct ratings by the fact that GMAC’s default risk is substantially lower than that
                             of GM:

                                 •    In the event of a bankruptcy, GM will not unilaterally drag down GMAC;

                                 •    GMAC can no longer be called upon to cover GM’s pension liabilities;

                                 •    The new majority shareholder is expected to steer a more independent course from
                                      GM and new operating agreements are planned;

                                 •    GMAC’s refinancing cost is expected to decline, especially since Citigroup also
                                      opened a $ 25bn credit line;

                                 •    Finally, even though Cerberus is a private equity fund, it appears to consider its
                                      interest in GMAC to be strategic in nature, since it has committed to reinvesting its
                                      dividends in GMAC during the first five years.

                             However, the agencies are divided as far as the evolution of GMAC’s rating is concerned.

Spreads & Credits Autos                             5 December 2006                                                         p.21
                            Indeed, each rating agency has a different outlook: developing for S&P, negative for Moody’s
                            and positive for Fitch. The agencies are holding off on assigning an investment grade rating
                            mainly because the new majority shareholder is a consortium and not a long-term, strategic
                            financial partner.

                            Nevertheless, GM’s objective of cleaving off GMAC’s rating from its own has been achieved,
                            even if it may take several months for the rating to be upgraded again to investment grade.

                            Financial recovery clause

                            The ultimate proof that Fiat and GM decided to sell of majority stakes in their respective CFCs
                            by necessity is that they both included repurchase options on the financing activity. In the case
As proof that
                            of Fidis (on the first transaction), this option will likely be exercised by Fiat, since the proposed
manufacturers are not
                            joint venture with CASA must be established by July 2007. Admittedly, Fiat does not have a call
eager to dispose of their
                            option in this new deal, but the car manufacturer — whose ratings have begun to be revised
CFCs, Fiat (as part of
                            upward — has kept a 50% stake and has a pre-emption right on the remaining 50%.
the first disposal) and
GM included call            Similarly, GM included a call option for GMAC’s automobile financing activities. This option is
options                     valid for 10 years, but may only be exercised if GM’s credit rating returns to investment grade or
                            is higher than GMAC’s rating.

                            What is the implication for Ford with respect to Ford Motor Credit?

                            From the time Ford’s credit rating was downgraded to speculative grade until the September
                            announcement of measures to speed up its turnaround plan, Ford reiterated that FMC is a
                            strategic asset.

                            We share this view entirely, but FMC’s strategic aspect only applies if its refinancing cost
                            enables it to serve the manufacturer’s strategy. In other words, because this asset is strategic,
                            the manufacturer needs it to be in good working order, i.e. with a rating that enables it to obtain
If Ford’s situation were
                            competitive funding over the long term. Yet, FMC is now progressively suffering from higher
to deteriorate further,
                            funding costs. Hence the announcement of a plan to restructure the operations in North
we believe that the sale
                            America in order to reduce its expenses and balance somewhat the increase of borrowing
of a majority stake in
                            costs. The efforts include salaried personnel reductions of about 2,000 people (c23% of the
FMC would have to be
                            total workforce in North America) through natural attrition, early retirement, voluntary and if
                            necessary involuntary redundancy.

                            We therefore believe that if Ford’s situation continues to deteriorate, it will have no choice but to
                            consider selling off a majority stake in FMC. In the short term, FMC could make greater use of
                            “whole loan sales” (the CFC originates the loan that is then sold to a financial partner with a
                            better rating that will fund it) which are still relatively undeveloped relative to GMAC in 2005-


                            Clearly a CFC is not only an essential component in a manufacturer’s marketing strategy but
                            also a source of growing, foreseeable and recurring earnings as well as an almost ideal
                            complement in terms of cash flow.

                            Add to that the fact that the CFC generates a satisfactory return, has low capital requirements
                            and does not bring about any major deterioration in the manufacturer’s risk exposure, and it is
                            clear why the manufacturer has a vested interest in being the sole shareholder. Therefore, a
                            manufacturer will only decide to sell off a majority stake if forced to do so in order for the CFC to
                            regain its investment grade rating.

   p.22                                            5 December 2006                                    Spreads & Credits Autos
                              An undervalued asset?
                              Financial analysts are generally unfamiliar with captive finance companies (CFCs) and how
                              they work, in part probably because their accounting is different to that used for a carmaker’s
                              manufacturing business and because of a complex system of statuses. As far as the rating
                              agencies are concerned, we will see later on in the report that, until 2001, all three applied the
                              same rating to carmakers as they did to their respective CFCs.
 Market is unfamiliar with
 captive finance              In the analysts’ defence, it must be said that carmakers provide little information about their
 companies, partly due        CFCs. For instance, Ford alone reports quarterly on the sales and results generated by FMC,
 to a lack of regular         while PSA does it only annually. We would also point out that Volkswagen has already held
 information                  one-off meetings about VW FS AG for equity and credit analysts. The other carmakers,
                              meanwhile, report little or nothing: prime examples are BMW and DaimlerChrysler, which do not
                              release annual reports on their CFCs since there is no holding company that oversees the
                              whole financial services activities. For instance, BMW’s “Financial Operations” segment (BMW
                              FO) includes not only the automobile financial services (BMW FS) but also some other marginal
                              financing activities.

                              So how can the market accurately value these CFCs? It seems clear to us that the market
                              underestimates such assets, and we will show why in this third chapter, where we emphasise
                              three key points: 1/ the different statuses of CFCs and what this means for the credit market,
                              2/ the approaches taken by rating agencies, and 3/ different valuation models for the equity
                              market to factor in the profitability of such assets more accurately.

                              1. Status differs from one CFC to the next
                              Although CFCs are all primarily aimed at providing their associated carmaker’s clients with car
                              loans, they do not all have the same status. Why is it important to take a CFC’s status into
 Not all CFCs have the
                              consideration? First of all, it is important to distinguish between ‘bank’ status and the status of
 same status
                              other specialist financial institutions.

                              Bank status, a guarantee that the carmaker applies good practices vis-à-vis its

                              In our sample, only Banque PSA Finance and RCI Banque have bank status. This means that
                              the two CFCs are subject to the French Banking Commission and must respect various
                              regulatory ratios in accordance with France’s 1984 banking law, including the European
                              Solvency Ratio (ESR - see glossary). As a result, profit distribution to the parent company in the
                              form of dividends remains limited and regulated despite there being no deposits involved.
 Only Banque PSA
                              Similarly, the banking law limits single weighted exposures to a maximum of 25% of CFS’s own
 Finance and RCI
                              equity, including the carmaker. Being a bank means operating within a clearly defined
 Banque have bank
                              framework, and being supervised by an external organisation means that the carmaker does
 status, with the
                              not have a free rein over its subsidiary, so for instance it cannot draw on its CFC’s equity to an
 constraints but also the
                              unreasonable extent during tough times.
 protection that this
 implies …                    On the other hand, if a French carmaker’s CFC enjoys bank status, its shareholders could be
                              invited by the regulatory authority, if it so sees fit, to provide it with the necessary support in
                              accordance with law n°84-46 article 52 (article L.511-42 of the Monetary and Financial Code).
                              This article states that “if an establishment’s situation justifies it, the governor of the Bank of
                              France will invite the shareholders or members to provide the support the establishment
                              needs”. The direct impact of article 52 is considerable and important for a bank shareholder that
 Some VW FS, BMW FS           must be absolutely sure of what it is doing when providing its support and experience to its
 Ford Motor Credit            banking subsidiary. In this particular case, where the shareholder (the carmaker) is not a bank,
 subsidiaries have bank       there is a limitation as to how this article can be applied, in that the power of sanction cannot
 status, but not the entire   force management to apply the article since the parent company does not have bank status.
 CFC…                         Moreover, which will legal powers be assigned to the Banking Commission to force the core

Spreads & Credits Autos                             5 December 2006                                                         p.23
                            shareholder to come to the rescue of its financing business?

…some CFCs are              Bear in mind that some CFCs have subsidiaries with bank status (but this status does not
merely regulated by         extend to the whole CFC). This is the case for VW Bank, BMW Bank and FCE Bank Plc (Ford
banking law …               Motor Credit’s European subsidiary).

..while others are not      We must also distinguish between CFCs with bank status and those regulated by banking law
regulated at all, which     but which do not have bank status and do not have to comply with regulatory ratios. This is the
offers less protection      case for Fidis. The carmaker therefore has greater leeway to manage its CFC.

                            Lastly, some CFCs are not regulated, which means that there is nothing in theory to prevent the
                            carmakers exerting excessive pressure on them. So it is therefore worth taking a look at any
                            measures taken by carmakers to provide their CFCs with a certain degree of autonomy.

                            Agreements and other clauses, fragile protection

                            In some cases, agreements and other comfort letters (see glossary) will exist between the CFC
                            and its associated carmaker. These agreements show that the carmaker is willing to allow its
                            CFC some autonomy and a managerial framework, particularly for CFCs that are not regulated.
                            However, not all the agreements signed have been aimed at providing the CFC with a degree
                            of autonomy, quite the contrary with cross-default, pari passu and negative pledge clauses (see
Agreements can exist
                            In the appendix (page 40) a detailed rundown of the statuses, agreements and dividend policies
between the carmaker
                            of the various CFCs is provided.
and its CFC to provide
the latter with a certain   In addition to these agreements, pressure can also be applied by the rating agencies, the legal
degree of autonomy          and fiscal framework, and bankruptcy laws (which are more or less restrictive depending on the
                            country). All these elements can help to shield the CFC from excessive influence from the

                            But what kind of protection do these agreements really offer should a crisis arise? As a last
But what kind of            resort, the carmaker could undermine these agreements by digging into the CFC’s cash pile in
protection do these         order to save the manufacturing part of its business. As a result, and despite clear agreements
agreements really offer     between the CFC and carmaker to optimise the CFC’s autonomy, we give them little
in the event of             importance since application of these agreements depends entirely on the good will of the
difficulties at the         carmaker without any supervision of regulated body. But it is worth pointing out that of the
carmaker?                   recent carmaker crises (Fiat, GM, Ford), none have called such agreements into question.
                            These groups have protected the profitability and solvency of their CFCs, in part probably
                            because they thought that they would be able to sell them off on good terms (at least in the first
                            two cases).

                            2. Does the CFC systematically deserve a better rating
                               than the carmaker?
                            In the first two chapters of the report, emphasis was placed on the close correlation between
                            the activities and strategies of the CFC on the one hand and those of the carmaker on the
                            other. Although the “core strategic” notion is quite clear, does the CFC systematically deserve a
                            better rating than the carmaker?

                            Some financing subsidiaries enjoy better ratings than their parent companies. This principle is
                            commonly known as ‘notching up’ and suggests that the likelihood of the CFC’s probability of
                            default is theoretically lower than the one of its parent company.

   p.24                                           5 December 2006                                   Spreads & Credits Autos
                                                                 Carmaker            Captive finance company         Notching-up
                                                         S&P      Moody's    Fitch   S&P    Moody's   Fitch    S&P    Moody's      Fitch
                             PSA                        BBB+       A3*       A-      A-      A2        NR       1         1        N/A
                             Renault                    BBB+          Baa1   BBB+    A-       A3       A-       1         1         1
                             VW                           A-          A3      A-     A-       A3       NR       0         0        N/A
                             BMW                         A+           A1      NR      NR      NR       NR      N/A       N/A       N/A
                             Ford                        CCC+         Caa1    B-      B       B1       B        2         3         1
                             GM                          B-*          Caa1    B*     BB+     Ba1      BB+       5         6         4
                             DaimlerChrysler             BBB      Baa1*      BBB+     NR       NR      NR      N/A       N/A       N/A
                             Fiat                        BB           Ba3    BB-      NR     Baa3     BBB*     N/A        3         4
                             Sources: rating agencies
                             GM and Ford ratings are those of the unsecured debt
                             NR: not rated      N/A: not applicable

                             The table above shows that for a single CFC, the notching-up compared to the carmaker could
                             materially differ from one rating agency to the other. Moreover, the same rating agency could
                             give a different notching-up to one CFC compared to another one. Which parameters do the
                             rating agencies take into account? Does their approach apply in cases where the CFC is owned
                             by a speculative-grade carmaker (Ford, GM, Fiat)? What are the impact(s) on the methodology
                             used to rate Fidis and GMAC given the fact they are no longer majority held by a carmaker?

                                    a. Our opinion: notching-up is justified

                             There are differences of opinion between the three rating agencies and their methodologies are
                             not uniform as evidenced later on. However, their assessments of a CFC are closely linked to
                             those of the manufacturer.
 S&P’s approach looks
                             The criteria taken into account by S&P (quality of fundamentals, regulatory framework, whether
 to be the most suitable.
                             or not the entity is regulated, bankruptcy law) seem the most prudent for assessing the
                             creditworthiness of these institutions. This led us to consider bank status as the criterion that
                             allows the greatest notching-up in a “normal” situation (investment grade category).

                             Conversely, Moody’s, which allows greater notching-up while not taking the status of the CFC
 The divergences in the
                             into account, is not sufficiently conservative in our view. As for Fitch, it applies a criterion of
 approaches of the rating
                             diversification of revenues generated by the subsidiary that does not seem suited to evaluating
 agencies underscore
                             captive financial companies.
 the difficulties involved
 in rating a captive         If we consider that the rating depends on the issuer’s probability of default and recovery rate,
 finance company.            then these two parameters look much better for the CFC than for the manufacturer. Therefore,
                             notching-up looks structurally justified in the case of a CFC, while the fact of having bank status
                             is not a prerequisite in our view but a factor that allows notching up to be maximised.

                             Much lower probability of default than a manufacturer

                             The probability of a CFC defaulting if the manufacturer is not in a difficult situation is extremely
                             low. However, even in the event of difficulties at the manufacturer, a default by a non-regulated
                             CFC is possible but is not in our view automatic. The examples of Fiat and GM show that
 The default probability     manufacturers are fully aware that their captive finance arms have much more value if they are
 of the CFC nonetheless      in good health and that they can protect them by transferring ownership. If the car maker thinks
 seems lower than that of    that restructuring can enable it to survive, it will therefore sell a majority stake in its CFC so that
 the manufacturer …          the CFC can obtain better refinancing costs and help it as a marketing tool, and also because
                             the income from the disposal will help it finance the restructuring. Let us also take the case
                             where the manufacturer believes that bankruptcy can no longer be avoided. It will nonetheless
                             be in its interests to sell all of the CFC, even at a knock-down price, so as to maximise
                             liquidities and begin the bankruptcy process under the best possible conditions (it would be
                             unthinkable for a car market to decide to file for Chapter 11 bankruptcy protection without
                             sufficient liquidities since it would then not be able to make any restructuring proposals at all). It
                             would be interesting to see Ford’s position vis-à-vis FMC, which it does not want to sell, if the

Spreads & Credits Autos                                 5 December 2006                                                              p.25
                           carmaker’s situation were to deteriorate further.

                           A much better recovery rate

                           Even in the, in our view unlikely, case where a bankrupt carmaker decides to drag its captive
                           finance company down with it, the recovery rate for the CFC would be much better than for the

                           The reason is that the carmaker’s assets mainly encompass brands and industrial equipment,
..even in the event of     which only have value if the business stays in operation. The fact that the manufacturer is in
default, the recovery      difficulty proves either that the production operations were deficient (production overcapacity,
rate would be better for   inadequate productivity) or that its brands lacked a good enough image or were not sufficiently
the CFC…                   well known. In both cases, the value of the assets could therefore be low compared with the
                           liabilities, especially if we include off balance sheet legacy liabilities (pensions, health insurance
                           in the USA), which are particularly high at carmakers as they are highly labour intensive.

                           Conversely, the quality of the CFC’s assets, which mainly comprise loans made to hundreds of
…which justifies           thousands and perhaps even millions of different clients, in our view would only be moderately
systematic notching-up,    affected by the carmaker going bankrupt. As we saw earlier, the risks would not be zero,
but by no more than two    particularly as regards the financing of the network and the residual values, but the value of the
notches                    assets would make it possible to recover a higher portion of the liabilities.

                           However, unless the carmaker sells a majority stake in the CFC, it is hard to see a rating
                           agency lifting the CFC’s rating by more than two notches given the close relations between the
                           CFC and the car maker.

                           In order to fully understand this two-notch limit and the diversity of the notching-ups, it is
                           necessary to have a closer look at the different methodologies of the rating agencies. We will
                           distinguish the approach in a “normal” situation when the carmaker is in the investment grade
                           category from the stressed situation of a carmaker with a junk rating.

                               b. Approach of the rating agencies in a non-stressed period

                           Fitch uses a combined top-down and bottom-up approach

                           Given that CFCs, with the exception of Fidis, are majority-owned by their associated carmakers,
                           1/ they are closely incorporated into their respective carmakers’ activities, and 2/ they are
                           strategically important assets for their respective groups. Based on these two key criteria, Fitch
                           will assign equal ratings to the CFC and to the carmaker on the basic assumption that the
                           CFC’s credit profile is consistent with that of its parent company.

                           Although Fitch combines a bottom-up approach and a top-down approach (see glossary), these
                           two criteria show the importance Fitch gives to relations between the CFC and its parent
                           company, i.e. it focuses somewhat more on the top-down approach. This is clearly shown by
                           the fact that identical ratings are assigned to CFCs owned by investment-grade carmakers and
                           to their parent companies, with the exception of RCI Banque which enjoys a notching-up.
Regulatory framework,
                           Which are the criteria whereby a CFC will be rated higher than its parent company, i.e. with a
                           focus on the bottom-up approach?
refinancing, relations
with the parent                 •    Legal and operational separation, and a regulatory framework that protects creditors
company …                            from the financing subsidiary. Fitch assesses the different agreements between the
                                     carmaker and its CFC, as well as the CFC’s status (regulated or non-regulated);
…moreover, revenues
must be generated               •    The CFC must generate a sufficient amount of revenue that is unrelated to the parent
independently of the                 company (35%-40% of revenues). This includes diversification activities but also
parent company (35%-                 loans granted for the sale of new and used cars not under any of the carmaker’s
40%)                                 brands. In our view only GMAC meets this criterion thanks to its mortgage business;

                                •    The CFC must enjoy greater liquidity than its parent company and refinance itself

   p.26                                           5 December 2006                                     Spreads & Credits Autos
 These criteria limit any             independently, i.e. the CFC must be able of raising funds on the markets;
 notching-up of CFCs
                                 •    There must be no cross-default provisions on a loan / loan derivative;

                                 •    The CFC’s corporate governance must be sufficiently independent of its parent

                            Even if a CFC is rated higher than its parent company, their ratings are nonetheless closely

                            While all five of these criteria are important, the first one seems more discriminating, which is
 Fitch flexible when it
                            partly why only RCI Banque enjoys a notching-up. This example shows that Fitch can be
 comes to applying these
                            flexible when it comes to applying these five criteria, especially the second criterion since RCI
 5 criteria
                            Banque does not in our view generate 35%-40% of its revenues from activities not related to
                            Renault (despite the financing of Nissan sales in Europe that represents some kind of
                            diversification). In Fitch’s view, the quality of RCI Banque’s fundamentals on a stand-alone
                            basis (bottom-up approach) makes up for the non-application of this second criterion.

                            S&P approach: three absolute prerequisites for a CFC to deserve a higher rating
                            than its parent company

                            The approach used by S&P theoretically caps the subsidiary’s rating at the same level as the
                            parent company’s. The CFC’s rating should therefore generally be equivalent to that of the
                            carmaker, with S&P considering both entities as one and the same entity given their
                            interdependent relationship. Nonetheless, some CFCs enjoy a notching-up by S&P. What
                            conditions apply?

                                 •    The CFC must be a regulated entity;
 Three absolute but
 insufficient                    •    The regulatory and legal framework, and to a lesser extent the agreements between
 prerequisites for a CFC              the CFC and the carmaker, should limit the parent company’s influence;
 to enjoy a higher rating
                                 •    Bankruptcy laws should prevent a bankruptcy from extending to the subsidiary.
 than its parent company
                            The CFC’s in our sample that meet S&P’s three criteria are based in France and Germany
                            (CFC subsidiaries). CFCs in these two countries are regulated and some of them enjoy bank
                            status. Moreover, the jurisdiction is such that a parent company that goes bankrupt will not drag
                            its CFC down with it. Indeed, in France, bankruptcy will be extended from one member of a
                            group to another if and only if: 1/ the second member too is insolvent and 2/ the consolidation of
                            the two entities does not make it possible to distinguish between the assets and liabilities of one
                            versus the other. In Germany, only the supervisory authorities can request a liquidation
 It is important that the
                            procedure against a bank.
 CFC’s refinancing
 capacity be independent    Bear in mind that these conditions are necessary but insufficient. The CFC must also have a
 of its parent company’s    better credit profile (performance, asset quality, balance sheet, diversified business profile) than
                            the carmaker on a stand-alone basis. One of S&P’s determining criteria is the CFC’s capacity to
                            raise sufficiently diversified funds independently of its parent company. S&P also assesses how
                            much importance the parent company gives to maintaining sufficiently solid fundamentals at the
                            CFC in all circumstances. Since it meets all the absolute conditions defined by S&P, Banque
                            PSA Finance’s rating has not been altered by the recent downgrade of its parent company with
                            which it has now a one notch difference. This highlights its A- rating on a stand-alone basis, in
                            line with that of its French competitor RCI Banque.

                            We can therefore conclude that the close relationship between a CFC and its associated
                            carmaker will limit any differentiation in S&P’s rating, and that any notching-up will generally be
                            of no more than one notch in the case of a CFC owned by an investment-grade carmaker.

Spreads & Credits Autos                            5 December 2006                                                         p.27
                             Moody’s approach: the CFC could be rated up to two notches above the parent

                             Moody’s uses the same criteria as S&P when it comes to rating a CFC. It rates the CFC higher
                             than the carmaker if it assesses the financing subsidiary has a lower probability of default
                             and/or a better recovery rate. For this, a number of criteria must be checked:

                                  •    The CFC must have a solid and independent financial profile (a franchise and a solid
                                       capitalisation, comfortable margins, a low gearing, satisfactory liquidity, good quality
                                       assets, etc.);

                                  •    The carmaker must be prepared to support its financing subsidiary in order to ensure
                                       solid credit quality. For this, Moody’s looks at the financing subsidiary’s strategic
                                       position within the group as well as its contribution to the carmaker’s revenues;

                                  •    The financing subsidiary must be able to continue operating in the event of the parent
                                       company defaulting. According to Moody’s, this means showing that it has a viable
                                       financing strategy in stress scenarios (insolvency of the carmaker). As far as
                                       fundamentals are concerned, being able to continue operating implies 1/ the CFC’s
                                       assets are of very good quality and have very good liquidity ratios, and 2/ a solid
                                       capital structure that enables it to deal with its various commitments.
At Moody’s, a CFC can        Unlike the other rating agencies, Moody’s approach does not explicitly require that the entity be
be notched up                regulated. For instance, Moody’s was the first agency, in late 2001, to notch up two non-
irrespective of its status   regulated agencies GMAC and Ford Motor Credit when GM and Ford were still investment

                             Even if these criteria are validated, the CFC’s rating will remain correlated with that of its parent
Maximum notching-up          company. Based on this principle, Moody’s will cap the notching-up at a maximum of two
is of two notches            notches. Of the CFCs examined in this report, none of those owned by an investment-grade
                             carmaker enjoy a 2-notch notching-up over their associated carmaker (at best one notch, in the
                             case of RCI Banque, Banque PSA Finance and VW Bank). BPF could however be the first CFC
                             to have a 2 notches gap since Moody’s placed PSA’s rating under negative review while saying
                             that BPF’s rating was not affected by the review.

                                 c. How do the rating agencies rate the captive financial
                                    services arm of a struggling auto maker?

                             As we just saw, notching-up is generally uncommon in the rating of CFC, with a special mention
                             for Fitch where almost all the captive finance companies owned by investment grade
                             automotive manufacturers have the same rating as the parent companies or are not rated

                             However, the CFCs Ford Motor Credit (FMC), GMAC and Fidis have much higher ratings than
                             their respective auto manufacturers, with gaps of as much as 6 notches! What approaches do
                             the rating agencies then use to rate the captive financial company of a struggling auto group?

                             Can the captive financial company offer greater security to investors than the
                             automotive maker?

There are no floor           Given the close relations between captive finance companies and their automotive
ratings for captive          manufacturers, how can such gaps emerge between their credit ratings? Do captive finance
finance companies.           companies have floor ratings? The case of FMC shows that the answer is no. Ford has had a
When the carmaker is         tough time in the last few quarters, and its finance subsidiary has not been spared, suffering
downgraded, so is the        rating downgrades via a knock-on effect. Why?
captive finance              Let us look more closely at the approach of S&P, the most conservative in rating FMC. At
company                      present, FMC has a B rating with a negative outlook, the same as Ford’s issuer rating and one
                             notch above Ford unsecured rating recently downgraded. For S&P, there are three reasons not
                             to differentiate between the rating of FMC and that of its parent company: 1/ the close
                             relationship between the two; 2/ Ford could impose demands on FMC, which is not regulated, if

   p.28                                             5 December 2006                                    Spreads & Credits Autos
                               need be; and 3/ if Ford were to go bankrupt, FMC would either be included in the bankruptcy, or
                               the bankruptcy of Ford would in the end bring about the bankruptcy of its subsidiary.

                              Change in Ford/FMC ratings at S&P                                       …and at Moody’s
                              BBB                                                                     A3
                              BBB-                                                                    Baa1
                              BB+                                                                     Baa2

                              BB                                                                      Baa3
                              B-                                                                      B2
                              CCC+                                                                    B3
                                     A pr- A ug- Dec- A pr- A ug- Dec- A pr- A ug- Dec- A pr- A ug-
                                      03    03    03   04    04    04   05    05    05   06    06            Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- M ay- Oct- M ar- Aug- Jan- Jun- Nov-
                                                                                                              01 01     01 02     02   03   03 03     04 04      05 05      06   06   06
                                                                           Ford               FMC
                              Source: S&P                                                             Source: Moody's                                     Ford                FMC

                               Irrespective of the intrinsic creditworthiness of FMC, its close relationship with Ford, which is
                               the sole shareholder, and the risk that this could mean in the event the shareholder goes
                               bankrupt explain this approach. It is also interesting to note that since July 2006, S&P has
                               raised by one notch the rating on FCE Bank Plc, even though it is a 100%-owned subsidiary of
                               FMC and therefore Ford, because it is covered by protective regulations (bank regulated by the
 In periods of stress,         UK Financial Services Authority). Similarly, note that even though its activity has nothing to do
 rating agencies               with the auto business, the rating of ResCap (GMAC’s mortgage arm) remains linked to that of
 endeavour to determine        GM, which indirectly owns 100% (although ResCap benefits from a larger notching-up than
 whether an auto group’s       GMAC).
 bankruptcy would
 simultaneously lead to        It should also be noted that Fitch raised the rating on FMC by one notch, and Moody’s by two
                               notches, primarily reflecting the potentially higher recovery rate at the CFC in the event that the
 the bankruptcy of its
                               car maker goes bankrupt, dragging its subsidiary down with it. That said, we do not expect the
 captive financial
                               rating gap to widen sharply, particularly at S&P, as long as Ford has not taken steps to protect
                               its financial subsidiary from its difficulties, and therefore allow the two ratings to be delinked.

                               While the rating agencies’ approaches vary to a greater or lesser degree in terms of how
                               conservative they are, they all endeavour, in times of stress, to assess whether the car maker
                               would drag its finance subsidiary down with it. In other words, they analyse the ability of the
                               CFC to offer a lower default probability or a higher recovery rate than the parent company.

                               Given the importance of refinancing costs for CFCs, necessarily linked to their ratings at least in
                               the long term, what solutions are available to auto groups to delink the ratings of their CFCs
                               from their own and, more importantly, to allow their CFCs to retain or restore an investment
                               grade rating?

                               Delinking the rating of the CFC from that of the automotive manufacturer
                               requires a sale of a majority stake in the capital …but will remain limited

                               We saw with the examples of Fiat and GM that car makers, in times of stress, look to protect
                               the ratings of their captive finance companies as best they can. Insofar as the safeguards put in
 For an auto
                               place by the auto maker do not offer sufficient guarantees in the eyes of the rating agencies
 manufacturer in severe
                               and that bank status does not allow substantial notching-up, the only way to strongly delink the
 difficulties, only a sale     ratings of a CFC and a car maker is to limit the capital ties between the two, which means
 of a majority stake in the    selling a majority stake in the CFC.
 CFC would allow the
 ratings to be delinked.       This is what we saw with the examples of Fidis and GMAC, the ratings on which were delinked
                               from those of the carmakers as soon as the sales were announced, as the examples of the
                               ratings of GM and GMAC at S&P and Moody’s show (see charts below).

Spreads & Credits Autos                                            5 December 2006                                                                                                  p.29
                             Change in GM/GMAC ratings at S&P                                       …and at Moody’s
                             BBB-                                                                   A3
                             BB+                                                                    Baa1
                             BB                                                                     Baa2
                             BB-                                                                    Baa3
                             B                                                                      Ba3

                             B-                                                                     B1
                                   A pr- A ug- Dec- A pr- A ug- Dec- A pr- A ug- Dec- A pr- A ug-   Caa1
                                    03    03    03   04    04    04   05    05    05 06      06
                                                                                                           Jun-01   Dec-01   Dec-03   A pr-05   Nov-05   Mar-06   Jun-06   Nov-06
                             Source: S&P                                  GM                GMA C    Source: Moody's                                 GM               GMA C

The presence of a call        Even in the event of a sale of a majority stake in the CFC to a strategic banking partner, the
can limit delinking of the    rating of a CFC will never be entirely independent of that of the carmaker. While the probability
captive financial             of default falls strongly thanks to the presence of the strategic partner, it still does not disappear
company’s rating from         entirely.
that of the
                              This is particularly true if the manufacturer has a call on all or part of the activities sold, which
                              was the case for Fiat in the first sale of Fidis, and for GM for the automotive financing activities
                              of GMAC (under certain conditions). The existence of a call raises the question of the potential
                              support from the new shareholder over the long term.

                              All told, even if an automotive manufacturer decides to sell a majority stake to protect the rating
                              of its CFC, the rating will remain strongly linked to that of the manufacturer, irrespective of the
                              creditworthiness of the new shareholder, who could be seen as non strategic if the
                              manufacturer keeps a call on the CFC.

                              3. Is the spread differential sufficient?
                              Insofar as an issuer’s spread is the product of its probability of default times its recovery rate,
                              the spreads of captive financial companies should be relatively narrow, and in any case
                              systematically narrower than those of the automotive manufacturers.

                              An examination of the cases of GM/GMAC and Ford/FMC shows that the spreads of the CFCs
Even though the risks         are indeed narrower than those of the carmakers, but that they can nevertheless reach peaks
are lower, the example        (750bp for GMAC and 650bp for FMC). These levels, seen in May 2005 when GM/GMAC and
of GMAC shows that            Ford/FMC were downgraded to the speculative category, implicitly suggest that the market
CFC spreads can               feared a default combined with a low recovery rate for the two CFCs, even though the gaps with
sometimes reach peaks         the spreads of their parent companies were sizeable (310bp and 210bp respectively). After the
                              downgrades, the spreads began to come down but those of GMAC did not really start to narrow
                              sharply until GM announced its plan to sell a majority stake in the capital in October 2005.
The only factor that
                              FMC’s spreads temporarily narrowed along with those of GMAC when GM announced the sale
enabled a sharp
                              (-100bp -170bp for GMAC) but then widened again. One month later they were back above the
narrowing of spreads
                              level seen the day before the sale announcement. FMC’s spreads then virtually stabilised until
was the announcement
                              July 2006 when it became apparent that the steady downgrades in its rating could force Ford to
of a sale of a majority
                              consider selling a majority stake, even though Ford had reiterated in September that FMC was
stake in the capital
                              a strategic asset. At present, FMC’s spread is 180bp wider than that for GMAC (290bp vs.
                              110bp), which is not justified in our view based solely on the fundamentals of the two CFCs.

   p.30                                                            5 December 2006                                                       Spreads & Credits Autos
                           Difference in spreads between GM and
                                                                                                                                  …and between Ford and FMC
                           1400                                                                                            1000   1200                                                                                            500
                                                                                                                           900                                                                                                    450
                           1200                                                                                                   1000                                                                                            400
                           1000                                                                                            700     800                                                                                            350
                                                                                                                           600                                                                                                    300
                                                                                                                           500     600                                                                                            250
                            600                                                                                                                                                                                                   200
                                                                                                                                   400                                                                                            150
                            400                                                                                            300
                                                                                                                           200     200                                                                                            100
                            200                                                                                                                                                                                                   50
                                0                                                                                          0           0                                                                                          0


























































                           Source: iBoxx                   Gap (rhs )                  GM CDS 5Y                   GMAC CDS 5Y    Source: iBoxx                   Gap (rhs )                  F CDS 5Y                   FMC CDS 5Y

                            In the case of automotive manufacturers with investment grade ratings, the gaps between the
                            spreads of the manufacturers and those of the CFCs are much smaller. However, investors
                            should systematically prefer bonds issued by CFCs since, in the event of difficulties, they
                            should logically suffer less from widening spreads and offer much better guarantees of

                            4. Are CFCs undervalued by shareholders in the
                            Although CFCs now account for nearly 50% of auto makers’ balance sheets in Europe and
                            even two-thirds in the case of GMAC and FMC, few equity analysts accord any particular value
                            to CFCs. When they do, for example because a sum-of-the-parts approach is a key valuation
                            method for carmakers (as in the case of Fiat, DCX or Renault), in general they assume a
                            multiple of one times equity, and do not take into account the profitability of the CFC. We will
 Equity analysts
                            see in this last chapter that this approach is not only unfair because it makes no distinctions for
 generally value the CFC
                            profitability, but that also it generally results in the asset being undervalued.
 on the basis of one
 times equity,              We could just give two simple reasons to illustrate the fact that a multiple of one times equity is
 independently of its       insufficient:
                                       •          Among the six transactions that we looked at (see the table below), only two were
                                                  carried out at multiples slightly below one times equity, namely the first deal involving
                                                  Fidis (0.95x) and the GMAC deal (0.86x by our calculations). Note, however, that in
                                                  these two cases, the auto manufacturers were under heavy pressure to sell and that
                                                  the profitability of the CFCs had already begun to suffer from falling volumes combined
                                                  with higher refinancing costs. A multiple of one times therefore seems particularly
                                                  severe and too low to value the CFCs of carmakers that are doing well and which are
                                                  generating healthy profitability;

                                       •          Furthermore, if the CFC were to decide to discontinue its activity, simple repayment of
                                                  the loans granted maturing in the next three to six years would be enough to repay the
                                                  debt taken out and the CFC’s balance sheet would then amount to surplus cash
 This multiple amounts                            equivalent to equity. This is proof that CFCs are worth at least one times equity and
 to valuing a CFC in                              even more when they are growing.
 liquidation, and
 therefore results in a     On the assumption that a multiple of one times the value of equity is not enough, we propose
 floor value                below three valuation methods, the first two of which also have the advantage of taking into
                            account the return on equity (ROE) of each CFC.

                            We used the average ROE for the last three years. Indeed, 2005 was probably a peak in terms
                            of ROE due to low interest rates and a low level of risk allowing writebacks of provisions. For
                            this reason, we took an average over three years (four years for FMC to take into account the
                            sharp decline in ROE during the first 9 months of 2006), which is more representative and
                            seems to be a better approximation of future profitability in that we do not expect radical
                            changes in the business model of CFCs.

Spreads & Credits Autos                                                             5 December 2006                                                                                                                              p.31
                             We also wondered if the difference in ROE was not attributable to the equity ratio of the CFC.
                             We can calculate this ratio simply by dividing the equity of the CFC by its total asset. We can
                             notice in the 2 chart below some kind of correlation between the ROE and the equity ratio that
                             could suggest that the CFC with the highest ROE are under-capitalised while those with weak
                             ROE are over-capitalised.

                            2005 equity ratio of the CFCs                                                  3Y average ROE vs 2005 equity ratio
                            12%                                                                                20%
                                      Cooke ratio
                            10%                                                                                15%
                             2%                                                                                 0%
























                                                                                                                           3Y avg ROE                             Equity ratio 2005

                            So urces: co m panies, IXIS Securities et IXIS C IB                                So urces: co m panies, IXIS Securities et IXIS CIB

                             However, this is not completely true since Banque PSA Finance and RCI Banque both have
                             high ROE despite their bank status and consequently the bank regulation that prevent them
                             from being under-capitalised. On the other hand, BMW FO has the same ROE than VW FS
                             despite a higher equity ratio.

                             Even though there is no direct correlation and in order to attenuate the difference of balance
                             sheet structure, we adjusted the average ROE. To do so, we used an adjusting factor that
                             compares the equity ratio of each CFC with the 8% Cooke ratio. Then we applied the adjusting
                             factors to calculate the adjusted average ROE as summarised in the table below. We then used
                             these adjusted ROE in our valuation models.

                                                                            FMC              BPF                     DC FS BMW FO                       GMAC          VW FS               FRI
                            3Y avg ROE                                    18.6%             17.1%      16.3%         15.6%            13.2%             13.1%          13.1%           9.0%
                            Equity ratio (2005)                             6.6%             9.1%       7.8%           9.1%           10.4%             6.8%             9.6%          8.9%
                            Adjusting factor (x)                              0.8             1.1        1.0               1.1             1.3              0.8            1.2            1.1
                            Adjusted avg ROE                              15.4%             19.4%      15.9%         17.8%            17.1%             11.1%          15.7%          10.1%
                            Sources: annual reports, IXIS Securities, IXIS CIB

The straight-line            The straight line regression of the banking sector
regression in the
banking sector values a      This first method is the most intuitive. We use the straight-line regression calculated by the
CFC generating an ROE        banking analysts at IXIS Securities. Each week, the analysts take for a sample of 20 banks the
of 15.3% (adjusted           P/BV multiple (market capitalisation at time t divided by book value or estimated net assets for
average ROE over the         2006) and compare it with the estimated ROE of the bank in question. The analysts then
last three years) at 1.8x    represent a cluster of 20 points of which the straight-line regression equation can be calculated.
book value.                  The most recent available update gave the following equation:
Only a 10% ROE could                                                                    P/BV = 0.1333 x ROE – 0.2544
justify a P/BV as low as
1x                           It is interesting to notice that this equation suggests that a 1x P/BV multiple corresponds to a
                             ROE below 10% while the adjusted 3 years average of the eight CFCs under review is 15.3%.

   p.32                                                             5 December 2006                                                                  Spreads & Credits Autos
                                   Cluster of points and straight-line regression for the banking sector
                                                         y = 0.1333x - 0.2544
                                                              R = 0.8913

                                              4.0                                                                                                                                       BBVA


                                   P/BV 06e


                                              2.5                                                                            Intesa
                                                                                                    SP IMI                              Credit Suisse

                                              2.0                                      MPS      UCI Santander BPVN
                                                                                                        BNPP               Dexia
                                                                                               Deutsche Bank
                                                                                                           KBC       ABN
                                              1.5                 Commerzbank

                                                    10                                    15                                       20                               25                         30
                                   Source: IXIS Securities, bank analysts team                                             ROE 07e

                                       We use the equation in the table below to deduce the market value of the different captive
                                       finance companies. To this end, we use the reported book value for the last fiscal year and the
                                       adjusted average ROE.

                                                                Adj ROE               P/BV derived            Reported BV                  Implied value                 Carmaker's
Name of the CFC                                                                                                                                                                            A/B (%)
                                                            3Y average                from equation                          Y-1                           (A)      market cap (B)
GMAC                                                               11.1 %                       1.22 x           $ 21,778m                       $ 26,661m                $ 16,821m             158%
FMC                                                                15.4 %                       1.79 x           $ 10,735m                       $ 19,269m                $ 15,149m             127%
DaimlerChrysler FS (DCFS)                                          17.8 %                       2.11 x            € 9,100m                       € 19,229m                € 44,904m                 43%
VW Financial Services (VW FS)                                      15.7 %                       1.83 x            € 5,849m                       € 10,731m                € 28,802m                 37%
Banque PSA Finance (BPF)                                           19.4 %                       2.34 x            € 2,429m                         € 5,677m               € 10,910m                 52%
RCI Banque                                                         15.9 %                       1.87 x            € 2,056m                         € 3,839m               € 25,060m                 15%
BMW Financial Operations (BMW FO)                                  17.1 %                       2.03 x            € 4,581m                         € 9,306m               € 26,915m                 35%
Fidis Retail Italia (FRI)                                          10.1 %                       1.09 x                € 866m                            € 945m            € 17,522m                  5%
Average                                                           15.3 %                        1.79 x                                                           Weighted average                   51%
NB: We considered VW's global financial services activities and not only those of VW FS AG
VW FS's 3Y average ROE has been restated to eliminate Europcar for the 3 years as well as LeasePlan in 2004 (only 2 months)
DCX FS net profits have been restated to eliminate the Toll Collect losses and writedowns on non-auto assets
FRI only includes Fiat Auto's retail financing. Wholesale financing and long term rental are still located at Fiat Auto
Sources: annual reports, IXIS Securities and IXIS CIB

                                       This gives an average P/BV of 1.8 times. According to this method, Fidis Retail and GMAC are
                                       penalised by the weakness of their ROE.

                                       Form of the Gordon Shapiro model

                                       The second method is based on a P/BV formula derived from the Gordon Shapiro formula. The
                                       latter calculates the value of a share as the discounted sum of future dividends. Dividends are
                                       deemed to increase each year by the same factor. The value of the share is equal to the ratio of
                                       the next dividend to the difference between the cost of equity (Ce) and perpetual dividend
                                       growth per share (g), so
 The BV multiple should
 depend on ROE …                                                                                                  P = div / (Ce - g)

                                       Given that the dividend is equal to the payout rate (POR) multiplied by EPS, which itself is
                                       equal to BV per share multiplied by ROE

Spreads & Credits Autos                                                                5 December 2006                                                                                              p.33
                                                                                          Div = BVps x ROE x por

 …so it cannot be the                                                             So P/BV = (ROE x POR) / (Ce – g)
 same for all financing
                                        If we assume that a company’s perpetual growth is equal to the non-distributed proportion of its
                                        profitability, i.e. g = (1-POR) x ROE, or POR = (ROE – g) / ROE,

                                        we can then express the following formula

                                                                                      P/BV = (ROE – g) / (Ce – g)
 The Gordon-Shapiro
                                        We use this formula to calculate the fair value for the various financing companies, which we
 method is very
                                        summarise in the first table on the following page and which yields a P/BV multiple close to 2x,
 discriminating (P/BV
                                        or even 2.4x and 3x respectively for RCI Banque and Banque PSA Finance thanks to high
 from 1x to 3x)
                                        adjusted ROE and a moderate cost of equity.

                                             Adj ROE        Cost of           Perpetual      P/BV Reported BV       Implied value            Carmaker's
Name of the CFC                                                                                                                                              A/B (%)
                                          3Y average          equity    growth (g) (*)                        Y-1                (A)      market cap (B)
GMAC                                           11.1 %         13.2 %              0.0 %      0.84 x     $ 21,778m       $ 18,301m             $ 16,821m           109%
FMC                                            15.4 %         13.2 %              0.0 %      1.16 x     $ 10,735m       $ 12,503m             $ 15,149m           83%
DaimlerChrysler FS (DCFS)                      17.8 %          8.6 %              1.3 %      2.24 x      € 9,100m       € 20,393m             € 44,904m           45%
VW Financial Services (VW FS)                  15.7 %          8.0 %              2.0 %      2.28 x      € 5,849m       € 13,328m             € 28,802m           46%
Banque PSA Finance (BPF)                       19.4 %          7.6 %              1.5 %      2.96 x      € 2,429m           € 7,180m          € 10,910m           66%
RCI Banque                                     15.9 %          7.6 %              1.5 %      2.38 x      € 2,056m           € 4,884m          € 25,060m           19%
BMW Financial Operations (BMW FO)              17.1 %          7.1 %              2.0 %      2.95 x      € 4,581m       € 13,501m             € 26,915m           50%
Fidis Retail Italia (FRI)                      10.1 %          9.7 %              1.5 %      1.05 x       € 866m             € 905m           € 17,522m            5%
Average                                        15.3 %                                       1.98 x                                     Weighted average           49%
NB: we applied to the CFC the same cost of capital than for the carmaker since the latter is usually the sole shareholder
(*) our assumptions regarding the perpetual growth rate are the following: 0% growth for the CFC of US carmakers (including Chrysler) due to the loss of market
shares. Regarding European full range carmakers, CFC's growth should outperform those of the volumes sold by the carmaker, hence a 1.5% perpetual growth,
except for the CFC that have a clear strategy to expand their perimeter (VW FS 2%). Premium carmakers (BMW, Mercedes, Audi) deserve a higher growth (2%)
due to faster growing volumes and a larger spectrum of services
Sources: annual reports, IXIS Securities and IXIS CIB

                                        Average transaction multiples

 The six most                           The third and last valuation method that we used involves calculating average multiples for a
 comparable                             set of six comparable transactions. We note that in the context of these transactions, the seller
 transactions, where                    is not always in a strong position. This was the case for Fiat at the time of the first disposal of
 some took place in a                   51% of Fidis Retail, as shown by the low P/BV multiple compared with the second transaction
 negative context, reveal               (0.96x vs 1.76x). Similarly, the disposal of 51% of GMAC, based on 0.86x BV according to our
 an average P/BV of 1.3x,               estimates, was highly influenced by GM’s financial difficulties and pressure to bring GMAC back
 which we think is a floor              to investment grade category. We note that this multiple only factors in the price paid by
 value.                                 Cerberus and not the exceptional dividend paid by GMAC to GM ($2.7bn) or the transfer of
                                        receivables to be securitised (worth $4bn). The average P/BV multiple of 1.29x should therefore
                                        be seen as a floor level.

Name of the CFC                                  Buyer                 Date       Price paid                BV                P/BV     Receivables P/receivables
50% Crédipar                                       PSA            29/12/98            € 280m            € 176m               1.59 x         € 1.6bn           0.17 x
Nissan Finance Europe                     RCI Banque              27/03/99            € 293m                 nc                  nc         € 2.6bn           0.11 x
50% AB Volvofinans                         Ford Credit            28/06/01        SEK 871m            SEK 667m               1.30 x     SEK 11.0bn            0.08 x
51% Fidis Retail Italia                4 Italian banks            11/03/03            € 370m            € 391m               0.95 x         € 2.5bn           0.15 x
51% GMAC                        Consortium Cerberus               03/04/06            $7.4bn            $8.6bn               0.86 x        $153.3bn           0.05 x
50% Fiat Auto Fin Serv             Credit Agricole SA             24/07/06          € 1,000m            € 568m               1.76 x         € 6.3bn           0.16 x
Average                                                                                                                      1.29 x                          0.12 x
50% LeasePlan                               VW FS Ag              04/11/04          € 1,000m            € 435m               2.30 x         € 5.7bn           0.18 x
Sources: annual reports and IXIS CIB estimates

                                        We have used these two average transaction multiples (P/BV and P/outstandings) and applied
                                        them to our list of financing companies (except for GMAC and Fidis where we have used the
                                        actual multiples) in order to calculate the theoretical fair value of the equity.

      p.34                                                             5 December 2006                                                  Spreads & Credits Autos
                                                    Reported BV            Implied value                Total                          Implied value                   Carmaker's         ((A+B)/2)/C
Name of the CFC                          P/BV                                                                       P/receiv
                                                                   Y-1                   (A)    receivables                                                (B)      market cap (C)                    (%)
GMAC                                   0.86 x            $21,778m                $18,809m              $320bn           0.05 x                $15,451m                    $16,821m                 102%
FMC                                    1.29 x            $10,735m                $13,886m              $140bn           0.12 x                $16,858m                    $15,149m                 101%
DaimlerChrysler FS (DCFS)              1.29 x               € 9,100m            € 11,771m              € 93bn           0.12 x               € 11,198m                   € 44,904m                  26%
VW Financial Services (VW FS)          1.29 x               € 5,849m             € 7,566m              € 55bn           0.12 x                € 6,573m                   € 28,802m                  25%
Banque PSA Finance (BPF)               1.29 x               € 2,429m             € 3,142m              € 22bn           0.12 x                € 2,649m                   € 10,910m                  27%
RCI Banque                             1.29 x               € 2,056m             € 2,659m              € 23bn           0.12 x                € 2,769m                   € 25,060m                  11%
BMW Fin Operations (BMW FO)            1.29 x               € 4,581m             € 5,925m              € 40bn           0.12 x                € 4,816m                   € 26,915m                  20%
Fidis Retail Italia (FRI)              1.76 x                € 866m              € 1,526m               € 9bn           0.16 x                € 1,372m                   € 17,522m                    8%
Sources: annual reports and IXIS CIB estimates

 Apart from some                      Conclusion: financing companies definitely look undervalued
 specific examples
 (GMAC, Fidis), a CFC                 In the table below, we have calculated the average P/BV for each CFC using the three methods
 should be valued at                  and have derived a theoretical fair value for each. Noteworthy is the fact that no two CFCs have
 1.4- 2.2x BV depending               the same P/BV multiple and they all have a multiple above 1x. Based on these methods, the
 on adjusted ROE                      CFCs should be valued at 1.4-2.2x BV depending on their adjusted ROE. CFCs’ theoretical fair
                                      value therefore represent on average 45% of the market capitalisation of carmakers with great
 Implied value of CFC
                                      disparities between Fidis Retail (6% of Fiat group’s capitalisation) and GMAC, which equates to
 equates to between 6%
                                      more than 100% of the market capitalisations for GM.
 and more than 100% of
 carmakers’ market                    We have two possibilities: either we are right to think that the CFCs are undervalued and hence
 capitalisation with                  the market capitalisation for carmakers should rise to factor this in, or the market has correctly
 average of 45%                       valued the CFCs, which suggest that the value of carmakers’ industrial businesses is lower than
                                      we think. We prefer the first explanation.

                                                                                               Average Reported BV              Implied value                       Carmaker's
Name of the CFC                                   P/BV 1            P/BV 2       P/BV 3                                                                                                       A/B (%)
                                                                                                 P/BV                 Y-1                            (A)         market cap (B)
GMAC                                               1.22 x             0.84 x      0.86 x         0.98 x         $21,778m               $21,257m                       $16,821m                    126%
FMC                                                1.79 x             1.16 x      1.29 x         1.42 x         $10,735m               $15,219m                       $15,149m                    100%
DaimlerChrysler FS (DCFS)                          2.11 x             2.24 x      1.29 x         1.88 x         € 9,100m              € 17,131m                       € 44,904m                     38%
VW Financial Services (VW FS)                      1.83 x             2.28 x      1.29 x         1.80 x         € 5,849m              € 10,542m                       € 28,802m                     37%
Banque PSA Finance (BPF)                           2.34 x             2.96 x      1.29 x         2.20 x         € 2,429m                € 5,333m                      € 10,910m                     49%
RCI Banque                                         1.87 x             2.38 x      1.29 x         1.85 x         € 2,056m                € 3,794m                      € 25,060m                     15%
BMW Financial Operations (BMW FO)                  2.03 x             2.95 x      1.29 x         2.09 x         € 4,581m                € 9,578m                      € 26,915m                     36%
Fidis Retail Italia (FRI)                          1.09 x             1.05 x      1.76 x         1.30 x          € 866m                 € 1,125m                      € 17,522m                       6%
Average                                            1.79 x            1.98 x       1.30 x        1.69 x                                                   Weighted average                          45%
Sources: IXIS Securities and IXIS CIB

                                                                                                                   …and their weight in car maker’s market
                                    Implied value of CFCs (€m or $m)
                                                 €m or $m                                                             50,000 M            €m or $m                                                 140%

                                                                                                                      40,000 M
                                                                                                                      30,000 M                                                                     80%

                                     10,000                                                                                                                                                        60%
                                                                                                                      20,000 M

                                                                                                                      10,000 M

                                           0                                                                                0M                                                                     0%
                                                 FRI     RCI        BPF   BMW    VW FS   FMC    DCFS   GMAC                         PSA     Ford      Fiat       GM Renault VW      BMW    DCX
                                                        Banque             FO
                                                                                                                           Market cap (B)          Im plied fair value of the CFC (A)     A/B in % (rhs )
                                     Sources: IXIS Securities, IXIS CIB                                             Sources: IXIS Securities, IXIS CIB

                                      Based on this reasoning, we would point to the relatively low implicit multiples used by the
                                      market for manufacturers’ industrial operations assuming a valuation for captive financing
                                      companies that is founded on the average of the methods described above. Our analysis is
                                      based on ratios of enterprise value to sales and EBIT and is limited to European auto makers.

Spreads & Credits Autos                                                        5 December 2006                                                                                                     p.35
                                                                                                               Theoritical valuation of the industrial
                                               Conventional valuation
       EV/sales                      2006e                   2007e                  2008e                        2006e               2007e                2008e
       BMW                           55.1%                   49.3%                  44.2%                        44.4%              38.4%                 32.7%
       DCX                           31.7%                   31.0%                  29.7%                        23.0%              22.5%                 21.4%
       Fiat                          46.4%                   43.3%                  39.4%                        44.2%              41.2%                 37.4%
       PSA                           21.2%                   20.4%                  18.4%                        12.2%              11.5%                  9.8%
       Renault                       42.8%                   40.1%                  35.5%                        35.5%              32.9%                 28.6%
       VW                            34.1%                   33.7%                  32.1%                        26.5%              26.2%                 24.8%

       EV/EBIT                       2006e                   2007e                  2008e                        2006e               2007e                2008e
       BMW                             6.9x                   6.2x                  5.5x                          5.0x                4.3x                  3.7x
       DCX                            10.2x                   6.3x                  5.5x                         10.2x                5.1x                  4.2x
       Fiat                           12.9x                   9.4x                  7.9x                         12.3x                9.0x                  7.5x
       PSA                            11.5x                   8.8x                  5.5x                         15.9x                9.1x                  4.2x
       Renault                        17.1x                  13.4x                  7.7x                         24.6x               17.2x                  7.9x
       VW                             18.1x                   8.5x                  6.9x                         24.5x                7.7x                  6.0x
       Source: IXIS Securities

        The comparison of the conventional ratios applied to the groups with the purely industrial ones
        raises a number of points:

               •         The low industrial profitability of a certain number of manufacturers in 2006/2007 and
                         therefore the substantial contribution from their CFC leads to higher EV/EBIT ratios
                         excluding captives than those resulting from the conventional valuation. This is
                         particularly true of PSA and Renault, where the growth engine has stalled badly
                         (product cycle trough), and VW, whose operating earnings have been dented by large-
                         scale restructuring charges;

               •         By contrast, in 2008, which is when the main players are set to see profitabilty turn up
                         (this is the timeframe on which investors have set their sights for the sector), there is a
                         clear valuation gap at the expense of industrial operations;

               •         Based on forecasts for 2008, the gap between consolidated valuaton and industrial
                         valuation is biggest at BMW, DaimlerChrysler and PSA, implying that their industrial
                         operations harbour substantial upside. There is nothing unusual about this: the CFCs
                         of these three groups have the highest theoretical Price/Net asset ratio (around or
                         even above 2x, as shown in the table above). Note particularly the low industrial ratios
                         for PSA in terms of EV/Sales and EV/EBIT.

       Comparison of EV/Sales multiples on                                                 Comparison of EV/EBIT multiples on
       consolidated and industrial basis                                                   consolidated and industrial basis
       50%                                                                                  8x


       30%                                                                                  5x

       20%                                                                                  3x


                                                                                                    DCX        BMW        PSA          VW       Renault         Fiat
                   PSA      DCX        VW         Renault       Fiat       BMW
                                                                                                             EV/EBIT 2008e          EV/EBIT 08e indus trial activities
                   EV/s ales 2008e           EV/s ales 08e indus trial activities
                                                                                            Sources: companies, IXIS Securities
       Sources: companies, IXIS Securities

        In conclusion, it would appear that the undervaluation of captive finance companies broadly
        undermines the multiples on which the equity markets value auto makers. But on what basis
        can we establish a fair value for CFCs and thereby do them justice?

        The GMAC and Fidis deals (particularly the second one) suggest that one way of extracting the

p.36                                          5 December 2006                                                                     Spreads & Credits Autos
                          theoretical value of CFCs is to sell the entities in full or in part, but this approach is at odds with
                          the conclusion we draw in this report, namely that it is in the interest of manufacturers to wholly
                          own their CFCs.

                          There is a clear need to raise general awareness, improve the equity market’s knowledge and
                          perception of captive finance entities, and gradually convince analysts and investors of the
                          hidden value contained in assets which are poorly understood but vital to the development of
                          auto manufacturers. It is our feeling that this message will be heard and that the comunication
                          strategies of car groups will be more active in this field. If the markets can be suitably
                          convinced, it should be possible to narrow the gap between the minimalist approach that values
                          CFCs on the basis of one times equity and a more realistic and discriminating valuation, such
                          as the one we advocate in this report.

Spreads & Credits Autos                          5 December 2006                                                            p.37
         The solvency ratio requires prudential capital base to be at least 8% of total risk-weighted
         assets and market risk exposure of the bank.

       Solvency ratios for RCI Banque…                                                                     …and Banque PSA Finance
        2,500                                                                                       10%     3,000                                                                                 10%

                                                                                                    9%                                                                                            9%

                                                                                                    8%      1,500                                                                                 8%
                                                                                                    7%                                                                                            7%

              0                                                                                     6%
                                                                                                                  0                                                                               6%
                        2001              2002            2003      2004 IFRS         2005 IFRS
                                                                                                                            2001               2002      2003       2004 IFRS      2005 IFRS
       Source: RCI Banque annual report          Equity      Capital adequacy ratio         Tier 1 ratio                                              Equity    Capital adequacy ratio    Tier 1 ratio
                                                                                                           Source: Banque PSA Finance annual report

         Letter of comfort is a letter, in which the parent company commits (or partially commits) to
         repay on behalf of its subsidiary if the latter is in default. While the existence of a comfort letter
         may highlight the intentions of the parent company, they typically do not confer any rights on

         The cross-default provision on a loan: if the company defaults on a loan A, the loan B which
         has a cross default clause will become payable even if there is no breach of default of payment
         on this loan B.

         Pari passu clause (equal): The A debt will rank equally in right of payment with the B debt,
         without preference among them.

         Negative pledge clause prevents the company from pledging certain assets to third parties
         The Top-down and bottom-up approaches in Fitch analysis: Fitch takes both a bottom-up
         and a top-down approach in its analysis of a finance subsidiary. In the Bottom Up approach,
         Fitch first assesses the finance company on a stand-alone basis (asset quality, financial
         structure, financing/liquidity) and then raises or lowers the rating according to the external
         criteria such as the degree of potential support from the parent company. Conversely, in the
         top-down approach, the rating of the finance company primarily reflects the rating of the parent
         company which had been lowered or upgraded by Fitch depending on the links between these
         two entities, the shareholder, the intrinsic qualities of the subsidiary.

         ROE = net attributable income restated from non-recurrent items / total equity on average

         Cost to income ratio: staff costs + other administrative charges / Net Banking Income

         Net Banking Income: Net Interest Revenue + net commissions + other net operating

         Loss ratio: (drawings on provisions + direct write-offs) / average total receivables

p.38                                                       5 December 2006                                                                              Spreads & Credits Autos
                          Breakdown of cash flows between the
                          manufacturer and its CFC
                                                                                                            Physical flows
                                                                                                            Financial cash inflows
                                                                                                            Financial cash outflows
                                                              15                                      Dealer

                                                                       3       4   11       12
                                       Captive financial

                                                                               7                 Retail clients

                          Source: IXIS CIB

                          1 – The manufacturer delivers the vehicles and spare parts to the dealership network;
                          2 – The CFC pays for the vehicles and parts for which it is providing financing;
                          3 – The CFC also finances the dealership’s used vehicles and net cash;
                          4 – The dealership reimburses the CFC when the vehicle is sold;
                          5 – The CFC provides financing for the retail purchaser of a new vehicle (traditional loan,
                          balloon loan or lease) or used vehicle;
                          6 – The vehicle is delivered to the retail client;
                          7 – The client repays his loan;
                          8 – In the event of a subsidised loan, the manufacturer pays the difference between the rate
                          offered by the CFC and that offered to the client (either in a lump sum at the time of the sale or
                          in monthly instalments over the life of the loan);
                          9 – The vehicle re-enters the dealership network (repurchase clause);
                          10 and 11 – The manufacturer or the dealership network pays the CFC the amount of the
                          vehicle repurchase commitments if they provided the guarantee;
                          12 – The CFC compensates the dealership network as business finders;
                          13 – The manufacturer may finance its CFC (through an intra-group loan, without a capital
                          14 – The CFC may, with some limitations, finance the manufacturer;
                          15 – Payment of a dividend by the CFC toward the manufacturer;
                          16 – Where necessary to comply with capital adequacy requirements, the manufacturer may
                          implement a capital increase on behalf of its CFC.

Spreads & Credits Autos                                5 December 2006                                                                p.39
                                                 Statutes and operating agreements of the
                                                 We summarise in the two tables below the statutes of the different captive finance companies
                                                 as well as potential operating agreements with the carmaker, the existence or not of a distinct
                                                 management between the carmaker an its CFC and the dividend policy.

    Captive finance                                             Banque PSA                                                           BMW financial
                                   RCI Banque                                                  VW financial services                                                      Ford Motor Credit
      company                                                     Finance                                                              services
         Country                       France                       France                              Germany                          Germany                                   USA
       Bank status                       Yes                          Yes                                   No                       Not a legal entity                             No
                               100% Renault, directly                                                                                100% BMW (not a
      Shareholders                                              100% Peugeot                       100% Volkswagen                                         100% Ford, indirectly owned controlled by the SEC
                                     owned                                                                                              holding *)

                                                                                                                          Subsidiaries in the
  Banking subsidiaries                   N.A                          N.A               VW Bank GmbH (German banking law) USA, Germany and                        FCE Bank, regulated by the FSA (UK)

                              Yes, but there are strong
                                                                                        No (VW board members sit on the board                             Yes, but there are still strong connections between the
 Separate management          connections between RCI                 No                                                                   N.A
                                                                                                     of VWFS)                                               management of Ford and FMC (2001 revival plan)
                                Banque and Renault

                                                                                                                                                                 An agreement has been in operation between
                                                                                                                                                              Ford and FMC since 2001 giving FMS a certain
                                                                                                                                                          operating independence vis-à-vis its parent company.
                                                                   Although BPF is
                                                                                                                                                          For example, FMC is not obliged to underwrite Ford's
                                       Independence          100%-owned by PSA,               The control agreement gives VW
                                                                                                                                                            debt, to make investments on behalf of Ford or its
                                concerning liquidities,     it is not responsible for   the right to publish or impose
                                                                                                                                                          subsidiaries. According to this agreement, Ford Credit
                              financing of RCI Banque       financing the industrial    instructions, for example on the overall           N.A
                                                                                                                                                           and Ford undertake to maintain an adequate level of
 Agreement / Corporate            vis-à-vis its parent          activities and has      commercial strategy, on the board of
                                                                                                                                                             equity in line with the activity of FMC. FMC is not
      Governance                       company.             limited direct exposure     VWFS.
                                                                                                                                                           obliged to accept credit risks, or residual risk beyond
                                                                     to PSA.
                                                                                                                                                             what woudl be acceptable in a conservative risk
                                                                                                                                                            management approach. Overall, Ford cannot force
                                                                                                                                                                  FMC to change its operating standards.

                                  RCI Banque does not            The financing of
                                                                                           "Comfort letter" (Patronatserklärung)                              Ford Credit and Ford are legally separate entities
                             finance Renault's industrial   BPF is independent of
                                                                                        between VWFS and VW Bank                                             and will continue to publish separate accounts.
                                      activities.                    PSA

                                                                                            Profit control and transfer agreement
                                                                                                   (Beherrschungs- und
                                                                                        Gewinnabführungsvertrag) between VW
                                                                                                                                                               Profit retention agreement, giving FMC a certain
                                                                                         and VWFS since 25 September 1996,
                                                                                                                                                             independence vis-à-vis Ford for the payment of
                                                                                          regulated by Aktiengesetz. Under this
                                                                                                                                                              dividends. Net profit before tax > 2% of capital
                                                                                         agreement, all of the profits generated
                                                                                                                                                             employed. Net profit > 1% of capital employed
                                                                                        by VWFS can be transferred to VW. Any
                                                                                         losses at VWFS will be reimbursed by
     Dividend policy                                                                                        VW.

                                         N.A                          N.A                                                                  N.A

                                                                                             Similarly, a profit and loss transfer
                                                                                        agreement exists between VWFS and
                                                                                        VW Bank Gmbh and other agreements
                                                                                        have existed with VWLGMBH since
                                                                                        September 2002

(*) BMW's financial services are integrated in the local commercial affiliates in the countries where BMW sells cars
Sources: companies

      p.40                                                                              5 December 2006                                                                   Spreads & Credits Autos
 Captive finance company                               GMAC                                   DaimlerChrysler Financial services                     Fidis Retail Italia S.p.a

         Country                                        USA                                                Germany                                             Italy

                           No, change of status into LLC (limited liability company) at the                                            No, but regulated by the bank of Italy, although not
       Bank status                                                                                     Not a legal entity
                                                    end of 2006                                                                                  subject to bank solvency ratios

                            49% GM since the disposal of 51% of GMAC to a consortium                                                  49% Fiat; 51% synesis finanziaria owned by SPIMI
      Shareholders                                                                            100% DaimlerChrysler. Not a holding
                                      led by fund Cerberus (30 nov 2006)                                                            (25%), Intesa (25%), Capitalia (25%), Unicredito (25%)

                            GMAC Bank (Germany), GMAC Commercial Mortgage Bank                                                      Fiat Bank (Germany), Fidis Bank (Austria) and Fiat Bank
  Banking subsidiaries                                                                          DaimlerChrysler Bank (Germany)
                                                  (USA)                                                                                               Polska (Poland)

                           No, even after the sale to the consortium (4 board members out
  Separate management                                                                                         N.A                      No (2 Fiat Auto board members sit on Fidis' board)
                                                of 13 will be from GM)

                                Subject to an investment grade rating or a rating > GMAC,                                                  The four shareholder banks can carry out capital
                                          GM has a option valid for 10 years                                                        increases, without the consent of Fiat Auto, in the event
                              to buy back the automotive financing activities of GMAC.                                               that certain performance indicators are not met (debt /
                                                                                                                                                         equity > 9.5%).

                                    After the acquisition, and according to pension fund
                           regulations in the USA, GMAC will no longer be required to pay                                                    Fidis is financially independent of Fiat Auto.
                                                pensions instead of GM.
  Agreement / Corporate
                                                                                                                                         Fiat Auto has a call valid until 31/01/08 that can be
                                 The consortium will have the possibility to increase
                                                                                                                                    exercised on a quarterly basis on the 51% owned by the
                               GMAC's equity and dilute the share of GM without first                         N.A
                                                                                                                                      banks. The banks also have a put in the event of a
                                            obtaining its agreement.
                                                                                                                                            change of ownership at Fiat or Fiat Auto.

                                                                                                                                         Fiat Auto The call would be exercised before July
                                                                                                                                       2007 with the set up of the joint venture 50/50 with
                                 GMAC's direct exposure to GM will be capped at $1.5bn
                                                                                                                                         CASA encompassing all Fiat Auto's financing

                                   GMAC will pay GM a dividend equal to the net profit
                              generated in 2006 up to the date of the sale plus an extra-                                              Distribution of profits: 5% retained in reserves until
                             dividend of $2.7bn linked to the conversion to a LLC. These                                            the reserve fund increases to 1/5 of the company's
                            dividends will be used to finance part of the reimbursement of                                          equity. The rest is shared between shareholders.
                               GM's debts to GMAC (around $5bn at the end of 2005).
     Dividend policy
                                The 1st and 2nd year after the sale, it is agreed that most
                                   of GMAC's profit after tax will not be paid out
                                   From the 3rd to the 5th year, Ceberus has agreed to
                              reinvest dividends received in GMAC preference shares.
Sources: companies

                                            We remind in the following table the name of the CFCs – or some of their affiliate - that have a
                                            bank status as well as their Cooke weighting.

                                          Bank status and Cooke weighting
                                          CFC and subsidiaries                                          Bank status                             Cooke weighting
                                          RCI Banque                                                                Yes                                                20%
                                          Banque PSA Finance                                                        Yes                                                20%
                                          VW Financial Services                                                       No                                            100%
                                          BMW Financial Services                                                      No                           Not a legal entity
                                          Ford Motor Credit                                                           No                                            100%
                                          GMAC                                                                        No                                            100%
                                          DaimlerChrysler FS                                                          No                             No bond issued
                                          Fidis Retail Italia                                                         No                                            100%

                                          VW Bank Gmbh                                                              Yes                                                20%
                                          FCE Bank Plc                                                              Yes                                                20%
                                          DaimlerChrysler Bank                                                      Yes                              No bond issued
                                          BMW Bank                                                                  Yes                              No bond issued
                                          GMAC Bank                                                                 Yes                              No bond issued
                                          Sources: companies, IXIS CIB

Spreads & Credits Autos                                                        5 December 2006                                                                                           p.41
        Diagrams of the                                                        carmakers                                           and                     their
        respective CFC
       PSA Peugeot Citroen Group and Banque PSA Finance

                                                                        PEUGEOT SA

                                                100%                                                    100%                           71.5%              100%
                                         Banque PSA Finance                                               Automobile                    Faurecia           Gefco

                                     Europe                           International                       Automobile Peugeot

                        Germany                 Austria                   Argentina              100% Automobile Citroën

                        Belgium               Luxembourg                    Brazil
                                                                                                 100% Peugeot Citroën
                         Spain                  France                     Mexico                     Automobile S.A

                          Italy               Netherlands

                        Portugal                  UK

                      Switzerland              Hungary

                         Poland                Slovakia

                                              Czech Rep.

       Sources: annual reports Banque PSA Finance & PSA 2005

       BMW Group and its financial services (no holding company)
                                                                          BMW AG


                                              BMW FINANCIAL SERVICES                                                  AUTOMOBILE                 MOTORCYCLE



                                Europe                         North America                     RoW                     ROLLS ROYCE
                                                                                                                         MOTOR CARS

                                 Germany                             USA

                                BMW Bank GmbH                         BMW
                                                                Financial Services
                               BMW Finanz                            NA LLC
                            Verwaltungs GmbH                                                       BMW
                           BMW Leasing GmbH


                                 BMW Financial
                                  Services Ltd


                                BMW Finance N.V.

                                                                                     (*) There is no holding company that oversees the whole financial services activities.
       Source: annual report BMW Group 2005

p.42                                          5 December 2006                                                                 Spreads & Credits Autos
                          DaimlerChrysler Group and its financial services (no holding company)
                                                                                               DAIMLERCHRYSLER AG


                                                                                                                                 MERCEDES CAR
                                                 DAIMLERCHRYSLER FINANCIAL SERVICES                                                                                     TRUCK GROUP

                                                                                                                                    Mercedes-Benz                         Mercedes-Benz
                                DaimlerChrylser             Chrysler         Mercedes-Benz DaimlerChrysler Truck
                                                                                                                                          Smart                              Freightliner
                                     Bank                   Financial           Financial        Financial
                                                                                                                                        Maybach                              Fuso (85%)
                                                                                                                                                                          Sterling Trucks
                                                                                                                                                                       Western star Trucks

                                                                                                                                CHRYSLER GROUP                     VAN, BUS AND OTHER

                                                                                                                                             Dodge                       Thomas Built Buses
                               USA/ Canada                    Europe                  Asia Pacific           RoW                            Chrysler                               Setra
                                                                                                                                              Jeep                                 Orion
                                                                   UK                       Thailand           Africa
                                                               Germany                       China          South Africa

                                                                Poland                                        Turkey


                                                             Czech Rep.


                                                                                                              (*) There is no holding company that oversees the whole financial services activities.
                          Source: annual report DaimlerChrysler 2005

                          Fiat Group and the automobile financial services (project to create a 50/50 JV with Credit

                                                                                                        FIAT GROUP

                                                                   50%                                                                          100%
                                                                                                                                                                     FIAT Auto
                                       Crédit Agricole                           Fiat Auto Services Financiers (FAFS)
                                                                                                                                                            (Fiat, Lancia, Alfa Romeo)

                                                                                                                  FIDIS                         85%
                                           FIDIS Retail                         FIDIS Dealers                                                                            Ferrari
                                                                                                            Long Term renting
                                                 Italy                                     Italy                        Italy                       49,9%                Iveco Finance
                                                Greece                                                                                                                      Holding
                                                                                     Switzerland                      France                                               Barclays
                                                France                                Denmark                         Austria                                              CNH
                                                                                                                                                      49,9%               CNH Capital
                                            Netherlands                                                                                                                   Europe SAS
                                                                                          France                      Poland
                                                                                                                                                      50,1%               BNP Paribas
                                                Spain                                                                                                                     Lease Group
                                               Portugal                                                                                                          Business Solutions

                                              Germany                                                                                           99%
                                                                                                                                                                    Magneti Marelli
                                                Ireland                                                                                                                  Comau

                                                                                                                                                                    Fiat Powertrain
                          Sources: annual reports Fiat Group & Fidis Retail Italia 2005

Spreads & Credits Autos                                             5 December 2006                                                                                                           p.43
       Ford Motor Company and Ford Motor Credit
                                                              FORD MOTOR CREDIT COMPANY


                                         FORD MOTOR CREDIT COMPANY                                                       AUTOMOTIVE

                                                                                                                                  North America
                                                                                                                              (Ford, Lincoln, Mercury)
             Ford Credit North America                        Ford Financial International

                                                                                                                                   South America
               USA/Canada                     Europe                 Asia Pacific            RoW

                                          FCE bank plc*                 Australia      Latin America                                    Europe

                                                      UK                                      Mexico
                                                                         Japan                                              Premier Automotive Group
                                                   Finland                                                                           ( PAG)
                                                                                         Puerto Rico
                                                                                               Brazil                                      Jaguar
                                                   Poland               Thailand
                                                 Czech Rep.                                                                              Land Rover
                                                                      New Zealand
                                         Ford Credit/Bank
                                         Volvo Car Finance               China               Argentina
                                                                                                                                        Aston Martin
                                            Land Rover                Indonesia
                                         Financial Services                             South Africa
                                              Jaguar                  Philippines
                                                                                        Saudi Arabia                                 Asia Pacific
                                         Financial Services                JV
                                         Mazda Credit/Bank

       Source: annual report Ford Motor Credit Company 2005                                         *S&P may separate FCE bank PLC’s rating from that of FMC.

       General Motors and GMAC
                                                                       GENERAL MOTORS

                   FIM Holdings          51% GENERAL MOTOR ACCEPTANCE
                  (Consortium led by                                                                          GM AUTOMOTIVE
                      Cerberus)                 CORPORATION (GMAC)

                  Financing                  Insurance                Mortgage
                                                                                                           GME            GMLAAM             GMAP
                                                                                                          Europe        Latin America        Asia
                     North                      Motor                 Residential        North
                                                               100%                                                         Africa          Pacific
                    American                  Insurance                 Capital         America
                    Operations                  Group                 Corporation
                      NAO                        MIC                   RESCAP

                                                                                         Buick             Opel               GM          GM Daewoo 50.9%
                                               Personal           22%   Cap
                                                Lines               mark Financial      Cadillac          Vauxhall                          Holden
                                                Group                 Group Inc
                                                                                       Chevrolet           Saab

                                                                                             GMC           Chevrolet
                     GMAC                                                                                (ex-Daewoo)
                    Finance                                                             Pontiac



       Source: annual report GMAC 2005

p.44                                         5 December 2006                                                            Spreads & Credits Autos
                          Renault SA and RCI Banque
                                                                              RENAULT SA                                                         NISSAN MOTOR
                                                          100%                                                                                    20%

                                                                                    RENAULT SAS                                                        AB VOLVO

                                                 100%                                                                                            100%
                                                                        RCI BANQUE                                                    AUTOMOBILE

                                                           Europe                                  International                              RENAULT

                                                                                                                             80.1%         RENAULT
                                             Germany                Netherlands                        Argentina                        SAMSUNG MOTOR

                                              Austria                 Portugal                           Brazil
                                              Belgium                Switzerland                        Mexico

                                               Spain                  Hungary                            Korea

                                              France                   Poland                          Morocco
                                                                     Czech Rep. /

                                               Finance Ltd

                                             Acceptance Ltd

                          Sources: annual reports RCI Banque & Renault 2005

                          Volkswagen Group, Volkswagen Financial Services AG and other financial services

                                                                                           VOLKSWAGEN GROUP
                                       VOLKSWAGEN FINANCIAL SERVICES                                                  AUTOMOBILE
                                                                                                   100%                          100%             100%    (34 % of votes)
                                  100%                              100%                  100%
                                                                                                  Volkswagen       Audi brand Commercial        Other
                                Volkswagen                                                                                                                  Scania AB
                                                                                                  Brand group        group     Vehicles       companies
                                 Financial                   Financial               Financial
                                Services AG                  Services                Services
                                                                                                                            Audi (99.14%)
                                  (Europe &               USA & Canada           Latin America
                                 Asia Pacific)                                                                                  Seat                         MAN AG


                                                     Volkswagen Bank GmbH
                                                                              50%                                        Volkswagen
                                                              Global Mobility Holding B.V.                                  Škoda
                                                              Lease Plan Corporation N.V
                                                   Volkswagen Leasing GmbH

                                                 VW Versicherungsdienst GmbH
                                                     (insurance brokerage)
                                              VW Versicherungsvermittlung GmbH
                                                    (insurance brokerage)

                                                  Volkswagen Re-insurance AG

                                                          FSVision GmbH

                                          National companies Europe/ Asia Pacific

                          Sources: annual reports VW Group and VW FS AG 2005

Spreads & Credits Autos                                          5 December 2006                                                                                    p.45
       □   Financial reporting calendar and key sector events
       December 2006
            □   1: French November registrations
            □   1: US November sales and North American production schedule for GM & Ford in 1Q07
            □   6: Scania, investor day
            □   6: Porsche, 2005/06 results, press conference
            □   7: Porsche, 2005/06 results, analyst conference
            □   15: European November registrations
       January 2007
            □   2: French December and FY06 registrations
            □   3: US December and FY06 sales
            □   5: Renault, 2006 full year commercial results
            □   7-9: Detroit Motor Show, press days
            □   8: PSA, 2006 full year commercial results
            □   16: European December and FY06 registrations
            □   25: Fiat, FY06 results
            □   26: Porsche, AGM
       February 2007
            □   1: French January registrations
            □   1: US January sales
            □   2: Volvo, FY06 results
            □   5: Faurecia, FY06 results
            □   7: PSA, FY06 results
            □   8: Scania, FY06 results
            □   8: Renault, FY06 results
            □   14: DCX, FY06 results
            □   15: Michelin, FY06 results
            □   20: Fiat, 2006 consolidated statements
            □   22: Continental, FY06 results
            □   27: DCX, publication of the 2006 annual report
       March 2007
            □   1: French February registrations
            □   1: US February sales and North American production schedule for GM & Ford in 2Q07
            □   7: MAN, FY06 results
            □   8-18: Geneva auto show
            □   9: VW, FY06 results, press conference
            □   13: VW, FY06 results, Analysts’ conference
            □   14: BMW, FY06 results, press conference
       April 2007
            □   2: French March registrations
            □   3: US March sales
            □   4: Volvo, AGM
            □   4: DCX, AGM
            □   5: Fiat, AGM
            □   18: Faurecia, 1Q07 revenues
            □   19: VW, AGM
            □   23: Fiat, 1Q07 results
            □   24: Continental, AGM
            □   24: Michelin, 1Q07 revenues
            □   25: Volvo, 1Q07 results
            □   26: DCX, 1Q07 results
            □   26: PSA, 1Q07 revenues
            □   27: Renault, 1Q07 revenues
            □   27: Scania, 1Q07 results

p.46                                            5 December 2006                            Spreads & Credits Autos

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     Spreads & Credits Autos                                       5 December 2006                                                          p.47