PART I
Item 1. Business
Overview
CNH Capital LLC (together with its consolidated subsidiaries, "CNH Capital," the "Company" or "we") is an indirect wholly-owned subsidiary of CNH Global N.V. ("CNH Global" and together with its consolidated subsidiaries, "CNH") and is headquartered in Racine, Wisconsin. As a captive finance company, our primary business is to underwrite and manage financing products for end-use customers and dealers of CNH America LLC ("CNH America") and CNH Canada Ltd. (collectively, "CNH North America") and provide other related financial products and services to support the sale of agricultural and construction equipment manufactured by CNH North America. The primary operating subsidiaries of CNH Capital include CNH Capital America LLC ("CNH Capital America"), New Holland Credit Company, LLC ("New Holland Credit") and CNH Capital Canada Ltd. ("CNH Capital Canada"). CNH Capital America is the primary financing and business entity of CNH Capital for the United States that enters into retail and wholesale financing arrangements with end-use customers and equipment dealers, while New Holland Credit acts as the servicer for retail and wholesale receivables originated by CNH Capital America.
As of December 31, 2012, Fiat Industrial S.p.A. ("Fiat Industrial," and together with its subsidiaries, the "Fiat Industrial Group") owned approximately 87% of CNH's outstanding common shares through its wholly-owned subsidiary, Fiat Netherlands Holding N.V. ("Fiat Netherlands").
On January 1, 2011, Fiat S.p.A. ("Fiat") effected a "demerger" under Article 2506 of the Italian Civil Code. Pursuant to the demerger, Fiat transferred its ownership interest in Fiat Netherlands to a new holding company, Fiat Industrial, including Fiat's indirect ownership of CNH Global, as well as Fiat's truck and commercial vehicles business and its industrial and marine powertrain business. Consequently, as of January 1, 2011, CNH Global became a subsidiary of Fiat Industrial. In connection with the demerger transaction, shareholders of Fiat received shares of the capital stock of Fiat Industrial. Accordingly, as of January 1, 2011 Fiat Industrial owned approximately 89% of the outstanding common shares of CNH Global through Fiat Netherlands.
On November 25, 2012, Fiat Industrial and CNH Global announced that they entered into a definitive merger agreement to combine the businesses of Fiat Industrial and CNH Global. The terms of the definitive merger agreement provide that Fiat Industrial, which indirectly owns approximately 87% of the outstanding share capital of CNH Global, and CNH Global will each merge into a newly-formed company organized under the laws of the Netherlands ("NewCo"). The parties anticipate that the shares of NewCo will be listed on the New York Stock Exchange at the closing of the merger. NewCo will also use its reasonable best efforts to cause the NewCo shares to be admitted to listing on the Mercato Telematico Azionario managed by Borsa Italiana shortly following the closing of the merger. The merger is expected to close in the third quarter of 2013, subject to customary closing conditions including, among others, the approval of the merger by the shareholders of each of Fiat Industrial and CNH Global, customary regulatory approvals and a condition capping the exercise of withdrawal rights by Fiat Industrial shareholders and opposition rights by Fiat Industrial creditors at €325 million in the aggregate. Fiat Industrial has agreed to vote all of its CNH Global shares in favor of the merger at the applicable CNH Global shareholders' meeting.
CNH Capital offers retail loan and lease financing to end-use customers for the purchase of new and used equipment and components, as well as commercial revolving account ("CRA") financing, insurance and other financial services. CNH Capital also provides wholesale financing to CNH North America equipment dealers and distributors (almost all of which are independently owned and operated). Wholesale financing consists primarily of dealer floorplan financing and gives dealers the ability to maintain a representative inventory of new products. In addition, CNH Capital provides financing to
dealers for used equipment taken in trade, equipment utilized in dealer-owned rental yards, parts inventory, working capital and other financing needs. As a holding company, CNH Capital generally does not conduct operations of its own but relies on its subsidiaries for the generation and distribution of profits.
To help fund its retail and wholesale financing business, CNH Capital participates in the asset-backed securitization markets. CNH Capital periodically transfers retail and wholesale receivables originated from end-use customers and dealers to special purpose entities, in exchange for cash proceeds from asset-backed securities issued by these special purpose entities. Investors in these asset-backed securities in turn receive payments on their securities based on the cash flows from the transferred receivables. CNH Capital continues to service the transferred receivables and may hold some retained interests in the transferred receivables. These special purpose entities and the investors in the asset-backed securities have no recourse beyond CNH Capital's retained interests for failure of any end-use customers or dealers to make payments on the transferred receivables when due.
CNH Capital's revenue is primarily generated through the income of its portfolio and the income generated through marketing programs with CNH North America. The size of the portfolio is in part related to the level of equipment sales by CNH North America. The portfolio profitability is linked to the credit quality of the borrowers, the value of collateral and the difference between lending and borrowing rates. For the year ended December 31, 2012, the percentage of revenue derived by us from CNH North America and other CNH affiliates was 47%.
Relationship with CNH
CNH believes that it is the most geographically diversified manufacturer and distributor of agricultural and construction equipment. As of December 31, 2012, CNH was manufacturing products in 37 facilities throughout the world and distributing products in approximately 170 countries through a network of approximately 11,500 dealers and distributors. CNH's worldwide manufacturing base includes facilities in Europe, Latin America, North America and Asia. For the year ended December 31, 2012, 44% of net sales of equipment were generated in North America, 31% in Europe, Africa, the Middle East and the Commonwealth of Independent States, 15% in Latin America and 10% in Asia Pacific, respectively. As of December 31, 2012, CNH had total assets of $35.4 billion and total shareholders' equity of $8.6 billion. For the year ended December 31, 2012, CNH had total revenues of $20.4 billion and net income attributable to CNH Global of $1.1 billion.
CNH organizes its operations into three business segments: agricultural equipment, construction equipment and financial services. For the year ended December 31, 2012, CNH sales of agricultural equipment represented 76% of total revenues, sales of construction equipment represented 18% of total revenues and revenue generated by financial services represented 6% of total revenues.
CNH Capital is a key financing source for CNH end-use customers and dealers in North America. As a captive finance business, we provide financial services for CNH North America customers located primarily in the United States and Canada. CNH North America offers subsidized financing programs, such as low-rate or interest-only periods and other sales incentive programs. We participate in and receive reimbursement for these programs, which allows us to offer financing to customers at advantageous interest rates.
Although our primary focus is to finance CNH manufactured equipment, we also provide retail and wholesale financing related to new and used agricultural and construction equipment manufactured by entities other than CNH North America. We are dependent on CNH for substantially all of our business, with revenues related to financing provided to CNH dealers and retail customers purchasing and/or leasing from CNH dealers accounting for over 90% of our total revenues for the year ended December 31 2012, and with loan portfolios attributable to such financing accounting for over 90% of our total managed receivables as of December 31, 2012.
The size of our portfolio is partially related to the level of equipment sales by CNH North America, which is driven in part by the strength of the agricultural and construction markets. The credit quality of our portfolio reflects the underwriting standards of CNH Capital, which are developed internally and independent of the sales volume goals of CNH North America.
On November 4, 2011, we and CNH Global entered into a support agreement, pursuant to which CNH Global has agreed to, among other things, (a) make cash capital contributions to us, to the extent necessary to cause our ratio of net earnings available for fixed charges to fixed charges to be not less than 1.05 for each fiscal quarter (with such ratio determined, on a consolidated basis and in accordance with accounting principles generally accepted in the United States of America, for such fiscal quarter and the immediately preceding three fiscal quarters taken as a whole), (b) generally maintain an ownership of at least 51% of the voting equity interests in us and (c) cause us to have, as of the end of any fiscal quarter, a consolidated tangible net worth of at least $50 million.
Products and Services
CNH Capital's financing products and services fall into the following main categories:
Retail (70.1% of managed portfolio as of December 31, 2012): CNH Capital provides and administers retail financing to end-use customers for the purchase or lease of new and used CNH North America equipment or other agricultural and construction equipment sold primarily through CNH North America dealers and distributors. Retail financing products primarily include retail installment sales contracts and finance leases. In addition, CNH Capital leases equipment to retail customers under operating lease agreements. The terms of retail contracts, finance leases and operating leases (collectively, "receivables") generally range from two to six years, and interest rates on the receivables vary depending on prevailing market interest rates and certain incentive programs offered by CNH North America.
CNH Capital utilizes a proprietary credit scoring model as part of the retail credit approval and review process. CNH Capital also provides servicing and collection operations generally performed through its subsidiary, New Holland Credit, for the retail financing products.
Wholesale (28.0% of managed portfolio as of December 31, 2012): CNH Capital provides wholesale financing to dealers to finance purchases of new and used agricultural and construction equipment and parts. In addition, CNH Capital extends credit to dealers for working capital and other financing needs. Currently, credit is extended to approximately 1,200 dealers (with each being a separate legal entity) with approximately 2,200 locations in North America.
The dealer financing agreements provide CNH Capital with a first priority security interest in the equipment and parts financed and possibly other collateral. A majority of dealers also provide a personal or corporate guaranty. The amount of credit extended is primarily based upon the dealer's expected annual sales, effective net worth, utilization of existing credit lines and inventory turnover. CNH Capital evaluates and assesses dealers on an ongoing basis as to their credit worthiness and conducts audits of dealer equipment inventories on a regular basis. The amounts of credit made available to dealers are reviewed on a regular basis, which is usually annually, and such amounts are adjusted when deemed appropriate by CNH Capital.
Other (1.9% of managed portfolio as of December 31, 2012): CNH Capital offers other financial products and services, including CRA Products and Insurance.