Finance receivables

Finance receivables are receivables of our financial services operations, which generally can be repaid without penalty prior to contractual maturity. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total on-balance sheet assets of our financial services operations net of intercompany balances are $3.5 billion and $3.3 billion, as of October 31, 2011 and October 31, 2010, respectively. Included in total assets are on-balance sheet finance receivables of $2.9 billion as of both October 31, 2011 and October 31, 2010.

Pursuant to the adoption of new accounting guidance relating to disclosures about the allowance for losses and credit quality of finance receivables, we determined that we have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.

Our finance receivables by major classification are as follows:



	2011			2010
(in millions)
Retail portfolio	$	1,613		$	1,917
Wholesale portfolio	1,334			1,006
Amounts due from sales of receivables	—			53
Total finance receivables	2,947			2,976
Less: Allowance for doubtful accounts	(34		)	(61		)
Total finance receivables, net	2,913			2,915
Less: Current portion, net^(A)	(2,198		)	(1,770		)
Noncurrent portion, net	$	715		$	1,145

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(A)	The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.

As of October 31, 2011, contractual maturities of our finance receivables are as follows:



	Retail Portfolio			Wholesale Portfolio		Total
(in millions)
Due in:
2012	$	919		$	1,334	$	2,253
2013	361			—		361
2014	240			—		240
2015	125			—		125
2016	47			—		47
Thereafter	17			—		17
Gross finance receivables	1,709			1,334		3,043
Unearned finance income	(96		)	—		(96		)
Total finance receivables	$	1,613		$	1,334	$	2,947

Securitizations

Our financial services operations transfer wholesale notes, retail accounts receivable, retail notes, finance leases, and operating leases through SPEs, which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs includes an economic interest in the transferred receivables and, historically, managing exposure to interest rates using interest rate swaps, interest rate caps, and forward contracts. In 2010, certain sales of retail accounts receivables were considered to be sales in accordance with guidance on accounting for transfers and servicing of financial assets and extinguishment of liabilities, and were accounted for off-balance sheet. For sales that do qualify for off-balance sheet treatment, an initial gain (loss) is recorded at the time of the sale while servicing fees and excess spread income are recorded as revenue when earned over the life of the finance receivables.

We received net proceeds of $4.5 billion, $1.5 billion, and $346 million from securitizations of finance receivables and investments in operating leases accounted for as secured borrowings in 2011, 2010, and 2009, respectively.

Off-Balance Sheet Securitizations

Effective July 31, 2010, our Financial Services segment amended the wholesale trust agreement with the Navistar Financial Dealer Note Master Trust (“Master Trust”). The amendment disqualified the Master Trust as a QSPE and therefore required the Master Trust to be evaluated for consolidation as a VIE. As we are the primary beneficiary of the Master Trust, the Master Trust’s assets and liabilities are consolidated into the assets and liabilities of the Company. Components of available wholesale note trust funding facilities were as follows:



	Maturity	As of
	Maturity	October 31, 2011		October 31, 2010
(in millions)
Variable funding notes ("VFN")	July 2012	$	500	$	500
Investor notes	October 2012	350		350
Investor notes	January 2012	250		250
Total wholesale note funding		$	1,100	$	1,100

Unutilized funding related to the variable funding facilities was $170 million and $500 million at October 31, 2011 and October 31, 2010, respectively.

TRAC, our consolidated SPE, utilizes a $100 million funding facility arrangement that provides for the funding of eligible retail accounts receivables. Subsequent to the adoption of new accounting guidance on accounting for transfers of financial assets, transfers of finance receivables from our Financial Services segment to the TRAC funding facility completed prior to November 1, 2010 retained their sale accounting treatment, while transfers of finance receivables subsequent to November 1, 2010 no longer receive sale accounting treatment. There were no remaining outstanding retained interests as of October 31, 2011.

The TRAC funding facility has been refinanced with a maturity date of March 2012. The facility is secured by $174 million of retail accounts and $33 million of cash equivalents as of October 31, 2011, as compared to $54 million of retail accounts and $21 million of cash equivalents as of October 31, 2010. There were $9 million and $78 million of unutilized funding at October 31, 2011 and October 31, 2010, respectively. As of October 31, 2011, all pledged receivables of the SPE are consolidated.

Retained Interests in Off-Balance Sheet Securitizations

Retained interests in off-balance sheet securitizations of $53 million at October 31, 2010, represented our over-collateralization of the TRAC conduit funding facility. As of October 31, 2011, all retail accounts sold into the conduit prior to November 1, 2010 were liquidated; therefore there were no retained interests in off-balance sheet securitizations.

When retained interests are recorded, we estimate the payment speeds for the receivables sold, the discount rate used to determine the fair value of our retained interests, and the anticipated net losses on the receivables in order to calculate the initial gain or loss on the sale of the receivables. Estimates are based on historical experience, anticipated future portfolio performance, market-based discount rates and other factors and are made separately for each securitization transaction. The fair value of our retained interests is based on these assumptions. We re-evaluate the fair value of our retained interests on a monthly basis and recognize changes in current income as required. Our retained interests are recognized as an asset in Finance receivables, net.

The following is a summary of our retained interests, or amounts due from sales of receivables:



	October 31, 2010
(in millions)
Excess seller's interests	$	32
Interest only strip	—
Restricted cash reserves	21
Total amounts due from sales of receivables	$	53

The key economic assumptions related to the valuation of our retained interests related to our retail account securitization are as follows:



	October 31, 2010
Discount rate	7.3	%
Estimated credit losses	—
Payment speed (percent of portfolio per month)	88.5	%

The sensitivity of our retained interests to an immediate adverse change of 10 percent and 20 percent in each assumption is not material. The effect of a variation of a particular assumption on the fair value of the retained interests is calculated based upon changing one assumption at a time. Oftentimes however, changes in one factor may result in changes in another, which in turn could magnify or counteract these sensitivities.

Finance Revenues

Finance revenues derived from receivables that are both on and off-balance sheet consist of the following:



	2011		2010
(in millions)
Finance revenues from on-balance sheet receivables:
Retail notes and finance leases revenue	$	136	$	183
Operating lease revenue	32		33
Wholesale notes interest	93		39
Retail and wholesale accounts interest	27		18
Total finance revenues from on-balance sheet receivables	288		273
Revenues from off-balance sheet securitization:
Fair value adjustments	1		37
Excess spread income	—		32
Servicing fees revenue	—		6
Gain (loss) on sale of finance receivables	1		(39		)
Securitization income	2		36
Gross finance revenues	290		309
Less: Intercompany revenues	90		90
Finance revenues	$	200	$	219

As a result of the adoption of new accounting guidance, substantially all of our securitization activity in 2011 results in the receivables being carried on our Consolidated Balance Sheet. Cash flows from off-balance sheet securitization transactions are as follows:



	2010		2009
(in millions)
Proceeds from sales of finance receivables	$	3,509	$	4,178
Servicing fees	6		8
Cash from net excess spread	32		31
Investment Income	—		1
Net cash from securitization transactions	$	3,547	$	4,218