FORD Motor Credit unit is poised to end 2008 in the red - its first yearly loss in more than a decade - as US consumers shun large pick-up trucks and sport-utility vehicles.

The financing arm of Ford Motor has traditionally been a cash cow for the auto maker, buoying it during periods of weak auto sales. Now the auto lender, faced with falling asset quality and burgeoning provisions for credit losses, may have to tap its parent for help at a time when Ford Motor is reeling from a sales slump and deeper production cuts.

“There’s cause for concern as the deterioration in asset quality could exceed levels we’ve seen in previous cycles,” says Mark Wasden, a debt analyst at Moody’s Investors Service. “Ford may find itself in the unusual position of needing to inject support into Ford Credit. This is a measure of the strategic importance that Ford Credit has for Ford.”

Ford Credit once paid billions of dollars a year in dividends to its parent, including a total of $US16.7 billion ($17.5 billion) from 1998 to 2006. But Ford Credit didn’t make a payout to Ford in 2007 and, because of its expected loss, doesn’t plan to make one this year, contrary to the unit’s earlier predictions.

Ford Credit’s problems come at a time when declining sales of profitable pick-up trucks and SUVs are hurting its parent. On Friday, Ford said it would slash its production for the rest of the year and reduced its earnings guidance.

“Specifically, we expect deteriorating residual values of lease vehicles to be lower than original expectations,” said Brian Johnson, an analyst at Lehman Brothers, in a report.

Mr Johnson estimates Ford Credit may need to write down $US1.1 billion related to price declines in SUVs and pick-up trucks.

Standard & Poor’s Ratings Services warned it will likely cut the credit ratings on the three US auto makers and their finance arms, due to weakening sales and concern over their cash flow.

“It’s hard to imagine what else you can throw into the mix to make things worse for the company,” say Efraim Levy, an equity analyst at S&P.

Mr Levy now expects Ford to post losses of $US1.63 a share this year.

Moody’s changed its ratings outlook on Ford, its credit business and Chrysler to negative, the first step toward a possible ratings downgrade.

The debt of Ford, Ford Motor Credit and General Motors also sank. Ford’s 7.45 per cent bonds due July 2031 were off 4.5 points, to trade at a distressed level of US61 cents. Ford Motor Credit’s 8 per cent bonds due December 2016 were off more than 2.5 points at around US76c. The bonds of the auto lenders have been considered benchmarks in the junk-bond market.

One factor in the problems of auto lenders is the declining residual value for pick-up trucks and SUVs, which are worth far less than had been assumed just a few months ago.

The rapidly shifting dynamics in the US auto industry - with petrol surging above $US4 per gallon and economic uncertainty on the rise - have battered sales of large vehicles that have long been the profit centres for the US auto industry.

Stuck holding the bag are dealerships and auto finance companies such as Ford Motor Credit, GMAC and CitiFinancial Auto, the auto finance unit of Citigroup, that are trying to sell inventories of thousands of these vehicles as they come off leases or are repossessed from owners unable to keep up with their car payments.

Under car lease agreements, these companies typically take vehicles back at the end of the lease period and sell them to dealers at discounted prices based on estimates of residual values. In the case of a lease, residual value is the worth of a car at the end of the lease period.

Residual value is calculated at the beginning of a car lease and is the primary determinant of monthly payments. Often times, aggressive residual values are used in order to lower the monthly payments through the lease period. This can result in the car being worth less at the end of the lease period than what its residual value suggests.

In other words, the auto leasing company is pushed into selling the car at a loss. And this loss is likely to be exacerbated if accompanied by falling market prices for the car as it further depresses its value.

Ford Credit should “closely monitor all the risks they have in their current and future portfolios, for both leases and loans,” says Matt Traylen, a senior director of economics and portfolio services at Automotive Lease Guide.

Shares of Ford closed down US51c Friday, off 8 per cent, to $US5.81.