UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30,~~December 31, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 001-36111

AMERICAN HONDA FINANCE CORPORATION

(Exact name of registrant as specified in its charter)



California			95-3472715
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

1919 Torrance Blvd., Torrance, California			90501
(Address of principal executive offices)			(Zip Code)

(310) 972-2555

(Registrant’s telephone number, including area code)

~~20800 Madrona Avenue, Torrance, California 90503~~

~~(Former name, former address and former fiscal year, if changed since last report)~~

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of exchange on which registered
1.300% Medium-Term Notes, Series A Due March 21, 2022	N/A	New York Stock Exchange
2.625% Medium-Term Notes, Series A Due October 14, 2022	N/A	New York Stock Exchange
1.375% Medium-Term Notes, Series A Due November 10, 2022	N/A	New York Stock Exchange
0.550% Medium-Term Notes, Series A Due March 17, 2023	N/A	New York Stock Exchange
0.750% Medium-Term Notes, Series A Due January 17, 2024	N/A	New York Stock Exchange
0.350% Medium-Term Notes, Series A Due August 26, 2022	N/A	New York Stock Exchange
1.600% Medium-Term Notes, Series A Due April 20, 2022	N/A	New York Stock Exchange
1.950% Medium-Term Notes, Series A Due October 18, 2024	N/A	New York Stock Exchange
0.750% Medium-Term Notes, Series A Due November 25, 2026	N/A	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of ~~October~~January 31, ~~2020,~~2021, the number of outstanding shares of common stock of the registrant was 13,660,000 all of which shares were held by American Honda Motor Co., Inc. None of the shares are publicly traded.

REDUCED DISCLOSURE FORMAT

American Honda Finance Corporation, a wholly-owned subsidiary of American Honda Motor Co., Inc., which in turn is a wholly-owned subsidiary of Honda Motor Co., Ltd., meets the requirements set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

AMERICAN HONDA FINANCE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended ~~September 30,~~December 31, 2020

Table of Contents


		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	2
	Consolidated Statements of Changes in Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
	Note 1 – Summary of Business and Significant Accounting Policies	6
	Note 2 – Finance Receivables	7
	Note 3 – Investment in Operating Leases	12
	Note 4 – Debt	14
	Note 5 – Derivative Instruments	1716
	Note 6 – Transactions Involving Related Parties	1817
	Note 7 – Income Taxes	2019
	Note 8 – Commitments and Contingencies	2221
	Note 9 – Securitizations and Variable Interest Entities	2322
	Note 10 – Other Assets	2423
	Note 11 – Other Liabilities	2423
	Note 12 – Other Income, net	2524
	Note 13 – Fair Value Measurements	2524
	Note 14 – Segment Information	2928
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3231
	Overview	3231
	Results of Operations	3332
	Financial Condition	4140
	Liquidity and Capital Resources	4948
	Derivatives	5453
	Off-Balance Sheet Arrangements	5453
	Contractual Obligations	5554
	New Accounting Standards	5554
	Critical Accounting Policies	5554
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5756
Item 4.	Controls and Procedures	5756
PART II – OTHER INFORMATION		5857
Item 1.	Legal Proceedings	5857
Item 1A.	Risk Factors	5857
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	5857
Item 3.	Defaults Upon Senior Securities	5857
Item 4.	Mine Safety Disclosures	5857
Item 5.	Other Information	5857
Item 6.	Exhibits	5958
Exhibit Index
Signature

Cautionary Statement Regarding Forward-Looking Statements

Certain statements included herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “scheduled,” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. In addition, all information included herein with respect to projected or future results of operations, cash flows, financial condition, financial performance, or other financial or statistical matters constitute forward-looking statements. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realized. The following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements:

•uncertainties regarding the duration and severity of the COVID-19 pandemic and the measures intended to reduce its spread and the related impact on our operations, liquidity and financial condition;

•declines in the financial condition or performance of Honda Motor Co., Ltd. or the sales of Honda or Acura products;

•changes in economic and general business conditions, both domestically and internationally, including changes in international trade policy;

•fluctuations in interest rates and currency exchange rates;

•the failure of our customers, dealers or counterparties to meet the terms of any contracts with us, or otherwise fail to perform as agreed;

•our inability to recover the estimated residual value of leased vehicles at the end of their lease terms;

•changes or disruption in our funding sources or access to the capital markets;

•changes in our, or Honda Motor Co., Ltd.’s, credit ratings;

•increases in competition from other financial institutions seeking to increase their share of financing of Honda and Acura products;

•changes in laws and regulations, including the result of financial services legislation, and related costs;

•changes in accounting standards;

•a failure or interruption in our operations; and

•a security breach or cyber attack.

Additional information regarding these and other risks and uncertainties to which our business is subject to is contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 filed with the Securities and Exchange Commission on June 22, 2020. Readers of this Quarterly Report should review the information contained in that report, and in any subsequent reports that we file with the Securities and Exchange Commission as such risks and uncertainties may be amended, supplemented or superseded from time to time. We do not intend, and undertake no obligation to, update any forward-looking information to reflect actual results or future events or circumstances, except as required by applicable law.

PART I – FINANCIAL INFORMATION

Item1. Financial Statements

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(U.S. dollars in millions, except share amounts)


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020
Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	2,950	$	1,503	Cash and cash equivalents	$	3,017	$	1,503
Finance receivables, net	Finance receivables, net	39,572		39,554		Finance receivables, net	40,830		39,554
Investment in operating leases, net	Investment in operating leases, net	34,438		33,843		Investment in operating leases, net	35,078		33,843
Due from Parent and affiliated companies	Due from Parent and affiliated companies	136		93		Due from Parent and affiliated companies	126		93
Income taxes receivable	Income taxes receivable	80		137		Income taxes receivable	199		137
Other assets	Other assets	1,217		1,378		Other assets	1,127		1,378
Derivative instruments	Derivative instruments	1,063		748		Derivative instruments	1,270		748
Total assets	Total assets	$	79,456	$	77,256	Total assets	$	81,647	$	77,256
Liabilities and Equity	Liabilities and Equity					Liabilities and Equity
Debt	Debt	$	51,290	$	50,132	Debt	$	52,771	$	50,132
Due to Parent and affiliated companies	Due to Parent and affiliated companies	111		72		Due to Parent and affiliated companies	131		72
Income taxes payable	Income taxes payable	207		239		Income taxes payable	230		239
Deferred income taxes	Deferred income taxes	6,809		6,589		Deferred income taxes	7,010		6,589
Other liabilities	Other liabilities	1,770		1,689		Other liabilities	1,725		1,689
Derivative instruments	Derivative instruments	822		972		Derivative instruments	667		972
Total liabilities	Total liabilities	61,009		59,693		Total liabilities	62,534		59,693
Commitments and contingencies (Note 8)	Commitments and contingencies (Note 8)					Commitments and contingencies (Note 8)	0		0
Shareholder’s equity:	Shareholder’s equity:					Shareholder’s equity:
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding 13,660,000 shares as of September 30, 2020 and March 31, 2020		1,366		1,366
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding 13,660,000 shares as of December 31, 2020 and March 31, 2020						Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding 13,660,000 shares as of December 31, 2020 and March 31, 2020	1,366		1,366
Retained earnings	Retained earnings	16,109		15,395		Retained earnings	16,634		15,395
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(116)		(175)		Accumulated other comprehensive loss	(60)		(175)
Total shareholder’s equity	Total shareholder’s equity	17,359		16,586		Total shareholder’s equity	17,940		16,586
Noncontrolling interest in subsidiary	Noncontrolling interest in subsidiary	1,088		977		Noncontrolling interest in subsidiary	1,173		977
Total equity	Total equity	18,447		17,563		Total equity	19,113		17,563
Total liabilities and equity	Total liabilities and equity	$	79,456	$	77,256	Total liabilities and equity	$	81,647	$	77,256

The following table presents the assets and liabilities of consolidated variable interest entities. These assets and liabilities are included in the consolidated balance sheets presented above. Refer to Note 9 for additional information.


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020
Finance receivables, net	Finance receivables, net	$	10,297	$	9,645	Finance receivables, net	$	8,724	$	9,645
Investment in operating leases, net	Investment in operating leases, net	472		493		Investment in operating leases, net	465		493
Other assets	Other assets	534		598		Other assets	439		598
Total assets	Total assets	$	11,303	$	10,736	Total assets	$	9,628	$	10,736
Secured debt	Secured debt	$	10,363	$	9,748	Secured debt	$	8,813	$	9,748
Other liabilities	Other liabilities	8		9		Other liabilities	6		9
Total liabilities	Total liabilities	$	10,371	$	9,757	Total liabilities	$	8,819	$	9,757

See accompanying Notes to Consolidated Financial Statements (Unaudited).

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(U.S. dollars in millions)


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenues:	Revenues:									Revenues:
Retail	Retail	$	426	$	443	$	833	$	876	Retail	$	423	$	438	$	1,256	$	1,314
Dealer	Dealer	25		57		57		122		Dealer	25		52		82		174
Operating leases	Operating leases	1,942		1,935		3,847		3,830		Operating leases	1,951		1,952		5,798		5,782
Total revenues	Total revenues	2,393		2,435		4,737		4,828		Total revenues	2,399		2,442		7,136		7,270
Leased vehicle expenses	Leased vehicle expenses	1,361		1,409		2,797		2,801		Leased vehicle expenses	1,391		1,463		4,188		4,264
Interest expense	Interest expense	226		318		490		640		Interest expense	207		307		697		947
Net revenues	Net revenues	806		708		1,450		1,387		Net revenues	801		672		2,251		2,059

Other income, net	Other income, net	17		23		29		43		Other income, net	17		24		46		67
Total net revenues	Total net revenues	823		731		1,479		1,430		Total net revenues	818		696		2,297		2,126
Expenses:	Expenses:									Expenses:
General and administrative expenses	General and administrative expenses	116		124		228		245		General and administrative expenses	116		124		344		369
Provision for credit losses	Provision for credit losses	(4)		58		(1)		106		Provision for credit losses	(19)		65		(20)		171
Early termination loss on operating leases	Early termination loss on operating leases	(59)		36		(115)		60		Early termination loss on operating leases	(18)		37		(133)		97

(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	(232)		174		(325)		205		(Gain)/Loss on derivative instruments	(259)		(76)		(584)		129
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	241		(184)		348		(146)		(Gain)/Loss on foreign currency revaluation of debt	279		145		627		(1)
Total expenses	Total expenses	62		208		135		470		Total expenses	99		295		234		765
Income before income taxes	Income before income taxes	761		523		1,344		960		Income before income taxes	719		401		2,063		1,361
Income tax expense	Income tax expense	208		135		355		273		Income tax expense	160		106		515		379
Net income	Net income	553		388		989		687		Net income	559		295		1,548		982
Less: Net income attributable to noncontrolling interest	Less: Net income attributable to noncontrolling interest	36		33		59		60		Less: Net income attributable to noncontrolling interest	34		27		93		87
Net income attributable to American Honda Finance Corporation	Net income attributable to American Honda Finance Corporation	$	517	$	355	$	930	$	627	Net income attributable to American Honda Finance Corporation	$	525	$	268	$	1,455	$	895

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(U.S. dollars in millions)


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019
Net income	Net income	$	553	$	388	$	989	$	687	Net income	$	559	$	295	$	1,548	$	982
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Foreign currency translation adjustment	Foreign currency translation adjustment	40		(23)		113		15		Foreign currency translation adjustment	107		41		220		56
Comprehensive income	Comprehensive income	593		365		1,102		702		Comprehensive income	666		336		1,768		1,038
Less: Comprehensive income/(loss) attributable to noncontrolling interest	Less: Comprehensive income/(loss) attributable to noncontrolling interest	55		22		113		67		Less: Comprehensive income/(loss) attributable to noncontrolling interest	85		47		198		114
Comprehensive income attributable to American Honda Finance Corporation	Comprehensive income attributable to American Honda Finance Corporation	$	538	$	343	$	989	$	635	Comprehensive income attributable to American Honda Finance Corporation	$	581	$	289	$	1,570	$	924

See accompanying Notes to Consolidated Financial Statements (Unaudited).

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(U.S. dollars in millions)


		Total		Retained earnings		Accumulated other comprehensive income/(loss)		Common stock		Noncontrolling interest			Total		Retained earnings		Accumulated other comprehensive income/(loss)		Common stock		Noncontrolling interest
Balance at March 31, 2019	Balance at March 31, 2019	$	17,268	$	15,088	$	(118)	$	1,366	$	932	Balance at March 31, 2019	$	17,268	$	15,088	$	(118)	$	1,366	$	932
Net income	Net income	687		627		—		—		60		Net income	982		895		—		—		87
Other comprehensive loss	Other comprehensive loss	15		—		8		—		7		Other comprehensive loss	56		—		29		—		27
Dividends declared	Dividends declared	(292)		(292)		—		—		—		Dividends declared	(292)		(292)		—		—		—
Balance at September 30, 2019		$	17,678	$	15,423	$	(110)	$	1,366	$	999
Balance at December 31, 2019												Balance at December 31, 2019	$	18,014	$	15,691	$	(89)	$	1,366	$	1,046

Balance at March 31, 2020	Balance at March 31, 2020	$	17,563	$	15,395	$	(175)	$	1,366	$	977	Balance at March 31, 2020	$	17,563	$	15,395	$	(175)	$	1,366	$	977
Adoption of accounting standard (Note 1)												Adoption of accounting standard (Note 1)	(75)		(73)		—		—		(2)
Net income	Net income	989		930		—		—		59		Net income	1,548		1,455		—		—		93
Other comprehensive income	Other comprehensive income	113		—		59		—		54		Other comprehensive income	220		—		115		—		105
Adoption of accounting standard (Note 1)		(75)		(73)		—		—		(2)
Dividends declared	Dividends declared	(143)		(143)		—		—		—		Dividends declared	(143)		(143)		—		—		—
Balance at September 30, 2020		$	18,447	$	16,109	$	(116)	$	1,366	$	1,088
Balance at December 31, 2020												Balance at December 31, 2020	$	19,113	$	16,634	$	(60)	$	1,366	$	1,173

See accompanying Notes to Consolidated Financial Statements (Unaudited).

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollars in millions)


		Six months ended September 30,					Nine months ended December 31,
		2020		2019			2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	989	$	687	Net income	$	1,548	$	982
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Debt and derivative instrument valuation adjustments	Debt and derivative instrument valuation adjustments	(122)		24		Debt and derivative instrument valuation adjustments	(180)		60
Provision for credit losses	Provision for credit losses	(1)		106		Provision for credit losses	(20)		171
Early termination loss on operating leases	Early termination loss on operating leases	(115)		60		Early termination loss on operating leases	(133)		97
Depreciation on leased vehicles	Depreciation on leased vehicles	2,832		2,827		Depreciation on leased vehicles	4,250		4,275
Accretion of unearned subsidy income	Accretion of unearned subsidy income	(745)		(849)		Accretion of unearned subsidy income	(1,118)		(1,255)
Amortization of deferred dealer participation and other deferred costs	Amortization of deferred dealer participation and other deferred costs	181		179		Amortization of deferred dealer participation and other deferred costs	273		272
Gain on disposition of leased vehicles	Gain on disposition of leased vehicles	(105)		(96)		Gain on disposition of leased vehicles	(162)		(113)
Deferred income taxes	Deferred income taxes	227		198		Deferred income taxes	409		273
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Income taxes receivable/payable	Income taxes receivable/payable	26		5		Income taxes receivable/payable	(71)		25
Other assets	Other assets	(2)		16		Other assets	44		60
Accrued interest/discounts on debt	Accrued interest/discounts on debt	29		23		Accrued interest/discounts on debt	34		37
Other liabilities	Other liabilities	73		(9)		Other liabilities	7		(31)
Due to/from Parent and affiliated companies	Due to/from Parent and affiliated companies	(5)		48		Due to/from Parent and affiliated companies	25		35
Net cash provided by operating activities	Net cash provided by operating activities	3,262		3,219		Net cash provided by operating activities	4,906		4,888
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Finance receivables acquired	Finance receivables acquired	(10,852)		(9,240)		Finance receivables acquired	(16,117)		(13,678)
Principal collected on finance receivables	Principal collected on finance receivables	8,995		8,605		Principal collected on finance receivables	13,674		13,024
Net change in wholesale loans	Net change in wholesale loans	1,770		780		Net change in wholesale loans	1,244		556
Purchase of operating lease vehicles	Purchase of operating lease vehicles	(7,710)		(9,684)		Purchase of operating lease vehicles	(11,963)		(14,020)
Disposal of operating lease vehicles	Disposal of operating lease vehicles	4,980		5,861		Disposal of operating lease vehicles	7,502		8,184
Cash received for unearned subsidy income	Cash received for unearned subsidy income	654		637		Cash received for unearned subsidy income	945		913
Other investing activities, net	Other investing activities, net	(5)		(2)		Other investing activities, net	(7)		(4)
Net cash used in investing activities	Net cash used in investing activities	(2,168)		(3,043)		Net cash used in investing activities	(4,722)		(5,025)

Statement continues on the next page.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollars in millions)


		Six months ended September 30,					Nine months ended December 31,
		2020		2019			2020		2019
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from issuance of commercial paper	Proceeds from issuance of commercial paper	$	21,539	$	16,053	Proceeds from issuance of commercial paper	$	31,037	$	24,449
Paydown of commercial paper	Paydown of commercial paper	(22,714)		(16,297)		Paydown of commercial paper	(29,821)		(24,361)
Proceeds from issuance of short-term debt	Proceeds from issuance of short-term debt	214		300		Proceeds from issuance of short-term debt	519		300
Paydown of short-term debt	Paydown of short-term debt	(433)		(1,100)		Paydown of short-term debt	(738)		(1,100)
Proceeds from issuance of related party debt	Proceeds from issuance of related party debt	734		1,580		Proceeds from issuance of related party debt	1,196		2,337
Paydown of related party debt	Paydown of related party debt	(912)		(1,580)		Paydown of related party debt	(1,373)		(2,526)
Proceeds from issuance of medium-term notes and other debt	Proceeds from issuance of medium-term notes and other debt	6,160		4,613		Proceeds from issuance of medium-term notes and other debt	7,817		5,911
Paydown of medium-term notes and other debt	Paydown of medium-term notes and other debt	(4,722)		(3,553)		Paydown of medium-term notes and other debt	(6,306)		(5,303)
Proceeds from issuance of secured debt	Proceeds from issuance of secured debt	3,241		2,743		Proceeds from issuance of secured debt	3,241		4,692
Paydown of secured debt	Paydown of secured debt	(2,688)		(2,613)		Paydown of secured debt	(4,281)		(3,916)
Dividends paid	Dividends paid	(143)		(292)		Dividends paid	(143)		(292)
Net cash provided by/(used in) financing activities		276		(146)
Net cash provided by financing activities						Net cash provided by financing activities	1,148		191
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	10		1		Effect of exchange rate changes on cash and cash equivalents	22		2
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	1,380		31		Net increase in cash and cash equivalents	1,354		56
Cash and cash equivalents and restricted cash at beginning of period	Cash and cash equivalents and restricted cash at beginning of period	2,085		1,383		Cash and cash equivalents and restricted cash at beginning of period	2,085		1,383
Cash and cash equivalents and restricted cash at end of period	Cash and cash equivalents and restricted cash at end of period	$	3,465	$	1,414	Cash and cash equivalents and restricted cash at end of period	$	3,439	$	1,439
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Interest paid	Interest paid	$	309	$	448	Interest paid	$	461	$	689
Income taxes paid	Income taxes paid	$	105	$	37	Income taxes paid	$	212	$	61

The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows.


		September 30,					December 31,
		2020		2019			2020		2019
Cash and cash equivalents	Cash and cash equivalents	$	2,950	$	808	Cash and cash equivalents	$	3,017	$	837
Restricted cash included in other assets (1)	Restricted cash included in other assets (1)	515		606		Restricted cash included in other assets (1)	422		602
Total	Total	$	3,465	$	1,414	Total	$	3,439	$	1,439

---------------------------------------------------------

(1)Restricted cash balances relate primarily to securitization arrangements (Note 9).

See accompanying Notes to Consolidated Financial Statements (Unaudited).

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary of Business and Significant Accounting Policies

Organizational Structure

American Honda Finance Corporation (AHFC) is a wholly-owned subsidiary of American Honda Motor Co., Inc. (AHM or the Parent). Honda Canada Finance Inc. (HCFI) is a majority-owned subsidiary of AHFC. Noncontrolling interest in HCFI is held by Honda Canada Inc. (HCI), an affiliate of AHFC. AHM is a wholly-owned subsidiary and HCI is an indirect wholly-owned subsidiary of Honda Motor Co., Ltd. (HMC). AHM and HCI are the sole authorized distributors of Honda and Acura products, including motor vehicles, parts and accessories in the United States and Canada.

Unless otherwise indicated by the context, all references to the “Company”, “we”, “us”, and “our” in this report include AHFC and its consolidated subsidiaries, and references to “AHFC” refer solely to American Honda Finance Corporation (excluding AHFC’s subsidiaries).

Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim information, and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of operations, cash flows, and financial condition for the interim periods presented. Results for interim periods should not be considered indicative of results for the full year or for any other interim period. These unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements, significant accounting policies, and the other notes to the consolidated financial statements for the fiscal year ended March 31, 2020 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on June 22, 2020. All significant intercompany balances and transactions have been eliminated upon consolidation.

Recently Adopted Accounting Standards

Effective April 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-13,, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments on a modified retrospective basis. The amendments replace the previous incurred loss impairment methodology with a methodology that reflects lifetime expected credit losses. The adoption of ASU 2016-13 resulted in an increase to the allowance for credit loss of $101 million along with an after-tax cumulative-effect reduction to opening retained earnings and noncontrolling interest of $75 million. Comparative information has not been restated and continues to be presented under previous accounting standards. Updated significant accounting policies are presented below.

Effective April 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments modify the disclosure requirements on fair value measurements in Topic 820, based on Financial Accounting Standards Board (FASB) Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements. Certain disclosure requirements were removed, modified and added in Topic 820. This standard did not have an impact on the consolidated financial statements.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company is currently assessing the impact of this standard on the consolidated financial statements. The Company plans to adopt the new guidance effective April 1, 2021.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. An update was also issued expanding the scope of this guidance. The guidance provides optional expedients and exceptions for applying GAAP to contracts or other transactions affected by reference rate reform if certain criteria are met. The guidance isbecame effective ~~immediately~~starting March 12, 2020 and may be applied prospectively through December 31, 2022. The Company is evaluating applicable contracts and transactions to determine whether to elect the optional guidance.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Significant Accounting Policies

Finance Receivables

Finance receivables include retail loan and dealer loan portfolio segments. The retail loan portfolio segment consists of retail installment contracts with consumers. The dealer loan portfolio segment consists of wholesale and commercial loans with dealers. Finance receivables are measured at amortized cost, less the allowance for credit losses. The amortized cost basis includes the unpaid principal balance, unearned origination fees, and deferred origination costs. Origination fees include payments received from AHM and HCI for incentive programs (refer to Note 6 regarding these related party transactions). Origination costs include payments made to dealers for rate participation and other initial direct costs (IDC). Accrued interest receivable balances are presented within other assets.

Revenue on finance receivables includes contractual interest income, accretion of origination fees, and amortization of origination costs. Contractual interest income is accrued using the simple interest method. Origination fees and costs are recognized in revenue using the interest method over the contractual life of the finance receivables. The recognition of finance revenue on retail loans is discontinued when the underlying collateral is repossessed or accounts are charged off. The recognition of finance revenue on dealer loans is discontinued when they are 90 days or more past due or when it has been determined the Company will be unable to collect all principal and interest payments.

Retail loans are charged off when they become 120 days past due or earlier if they have been specifically identified as uncollectible. Dealer loans are charged off when they have been individually identified as uncollectible. Charge-offs of the amortized cost basis are recognized as a reduction to the allowance for credit losses. Subsequent recoveries are credited to the allowance. Charge-offs of accrued interest receivables are reversed against finance revenue.

Allowance for Credit Losses

The allowance for credit losses is management’s estimate of lifetime expected credit losses on the amortized cost basis of finance receivables which is deducted from or, in the case of expected net recoveries, added to the amortized cost. The Company has elected not to measure an allowance for credit losses for accrued interest receivable. The allowance is measured on an undiscounted basis. Management evaluates the allowance, at minimum, on a quarterly basis.

The retail loan portfolio segment consists of homogeneous loans with relatively small balances. The allowance for retail loans is measured on a collective basis. The Company's historical experience provides the primary basis for estimating the allowance. The modeling methodology used to estimate the allowance incorporates vintage loss and delinquency migration analysis. Retail loans are segmented into pools with similar risk characteristics. Currently, retail loans are segmented by origination quarter, internal credit grade at origination, product type, and original term. Past economic conditions and other attributes of the pools including loan-to-value ratios at loan inception are also taken into consideration when assessing historical credit loss experience. Current and forecasts of future economic factors such as unemployment rates, bankruptcies and used vehicle prices are applied in the modeling to estimate current expected credit losses. Management will also consider qualitative adjustments given the inherent uncertainty in estimating expected credit losses and the imprecision of any modeling methodology.

The allowance for dealer loans is measured at the individual dealer level when they have been specifically identified as impaired. Dealer loans are considered impaired when it is probable that the Company will be unable to collect the amounts due according to the terms of the applicable contracts. The Company’s determination of whether dealer loans are impaired is based on evaluations of the dealership's payment history, financial condition, ability to perform under the terms of the loan agreements, and collateral values, as applicable. Expected credit losses on impaired dealer loans are measured based upon the specific circumstances of each dealer considering all expected sources of repayment or the fair value of the collateral if foreclosure is probable. The allowance for dealer loans that have not been specifically identified as impaired is measured collectively primarily using historical loss rates.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 2. Finance Receivables

Finance receivables consisted of the following:


			September 30, 2020								December 31, 2020
			Retail		Dealer		Total				Retail		Dealer		Total

		(U.S. dollars in millions)								(U.S. dollars in millions)
Finance receivables	Finance receivables		$	36,674	$	3,681	$	40,355	Finance receivables		$	37,291	$	4,278	$	41,569
Allowance for credit losses	Allowance for credit losses		(405)		(8)		(413)		Allowance for credit losses		(355)		(8)		(363)
Deferred dealer participation and other deferred costs	Deferred dealer participation and other deferred costs		441		0		441		Deferred dealer participation and other deferred costs		437		0		437
Unearned subsidy income	Unearned subsidy income		(811)		0		(811)		Unearned subsidy income		(813)		0		(813)
Finance receivables, net	Finance receivables, net		$	35,899	$	3,673	$	39,572	Finance receivables, net		$	36,560	$	4,270	$	40,830

			March 31, 2020								March 31, 2020
			Retail		Dealer		Total				Retail		Dealer		Total

		(U.S. dollars in millions)								(U.S. dollars in millions)
Finance receivables	Finance receivables		$	34,623	$	5,606	$	40,229	Finance receivables		$	34,623	$	5,606	$	40,229
Allowance for credit losses	Allowance for credit losses		(364)		(6)		(370)		Allowance for credit losses		(364)		(6)		(370)
Deferred dealer participation and other deferred costs	Deferred dealer participation and other deferred costs		441		0		441		Deferred dealer participation and other deferred costs		441		0		441
Unearned subsidy income	Unearned subsidy income		(746)		0		(746)		Unearned subsidy income		(746)		0		(746)
Finance receivables, net	Finance receivables, net		$	33,954	$	5,600	$	39,554	Finance receivables, net		$	33,954	$	5,600	$	39,554

Finance receivables include retail loans with a net carrying amount of ~~$10.3~~$8.7 billion and $9.6 billion as of ~~September 30,~~December 31, 2020 and March 31, 2020, respectively, which have been transferred to bankruptcy-remote Special Purpose Entities (SPEs) and are considered to be legally isolated but do not qualify for sale accounting treatment. These retail loans are restricted and serve as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Credit Losses

The following is a summary of the activity in the allowance for credit losses of finance receivables:

~~AMERICAN HONDA FINANCE CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~


			Three and six months ended September 30, 2020								Three and nine months ended December 31, 2020
			Retail		Dealer		Total				Retail		Dealer		Total

		(U.S. dollars in millions)								(U.S. dollars in millions)
Beginning balance as of July 1, 2020			$	425	$	9	$	434
Beginning balance as of October 1, 2020									Beginning balance as of October 1, 2020		$	405	$	8	$	413
Provision	Provision		(3)		(1)		(4)		Provision		(18)		(1)		(19)
Charge-offs	Charge-offs		(47)		(1)		(48)		Charge-offs		(64)		0		(64)
Recoveries	Recoveries		29		1		30		Recoveries		32		1		33
Effect of translation adjustment	Effect of translation adjustment		1		0		1		Effect of translation adjustment		0		0		0
Ending balance as of September 30, 2020			$	405	$	8	$	413
Ending balance as of December 31, 2020									Ending balance as of December 31, 2020		$	355	$	8	$	363

Beginning balance	Beginning balance		$	364	$	6	$	370	Beginning balance		$	364	$	6	$	370
Cumulative effective of adopting ASU 2016-13	Cumulative effective of adopting ASU 2016-13		98		3		101		Cumulative effective of adopting ASU 2016-13		98		3		101
Beginning balance as of April 1, 2020	Beginning balance as of April 1, 2020		462		9		471		Beginning balance as of April 1, 2020		462		9		471
Provision	Provision		0		(1)		(1)		Provision		(18)		(2)		(20)
Charge-offs	Charge-offs		(113)		(1)		(114)		Charge-offs		(177)		(1)		(178)
Recoveries	Recoveries		55		1		56		Recoveries		87		2		89
Effect of translation adjustment	Effect of translation adjustment		1		0		1		Effect of translation adjustment		1		0		1
Ending balance as of September 30, 2020			$	405	$	8	$	413
Ending balance as of December 31, 2020									Ending balance as of December 31, 2020		$	355	$	8	$	363

			Three and six months ended September 30, 2019								Three and nine months ended December 31, 2019
			Retail		Dealer		Total				Retail		Dealer		Total

		(U.S. dollars in millions)								(U.S. dollars in millions)
Beginning balance as of July 1, 2019			$	193	$	11	$	204
Beginning balance as of October 1, 2019									Beginning balance as of October 1, 2019		$	197	$	0	$	197
Provision	Provision		60		(2)		58		Provision		65		0		65
Charge-offs	Charge-offs		(80)		(9)		(89)		Charge-offs		(86)		0		(86)
Recoveries	Recoveries		24		0		24		Recoveries		23		0		23
Effect of translation adjustment	Effect of translation adjustment		0		0		0		Effect of translation adjustment		0		0		0
Ending balance as of September 30, 2019			$	197	$	0	$	197
Ending balance as of December 31, 2019									Ending balance as of December 31, 2019		$	199	$	0	$	199

Beginning balance as of April 1, 2019	Beginning balance as of April 1, 2019		$	193	$	8	$	201	Beginning balance as of April 1, 2019		$	193	$	8	$	201
Provision	Provision		97		9		106		Provision		162		9		171
Charge-offs	Charge-offs		(144)		(17)		(161)		Charge-offs		(230)		(17)		(247)
Recoveries	Recoveries		51		0		51		Recoveries		74		0		74
Effect of translation adjustment	Effect of translation adjustment		0		0		0		Effect of translation adjustment		0		0		0
Ending balance as of September 30, 2019			$	197	$	0	$	197
Ending balance as of December 31, 2019									Ending balance as of December 31, 2019		$	199	$	0	$	199

The adoption of ASC 2016-13 resulted in an increase to the allowance for credit loss of $101 million, primarily for retail loans. The allowance for retail loans at the beginning of the ~~six~~nine months ended ~~September 30,~~December 31, 2020 reflected a significant increase in expected credit losses on retail loans due to the impact of COVID-19. Government measures that were enacted in an effort to slow down and control the spread of COVID-19 have had a severe adverse impact on economic conditions, including a significant increase in unemployment. Forecasts of weaker economic factors were reflected in this estimate, including a sharp rise in unemployment rates. Net charge-offs of retail loans during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 were favorable relative to the expected credit losses for the period, which had a positive effect on the provision for credit losses. The forecasted economic factors that were applied in the modeling as of ~~September 30,~~December 31, 2020 were ~~slightly~~ more favorable as compared to those applied at the beginning of the period which contributed to the reduction in the allowance for retail loans. ~~The allowance for retail loans acquired during the six months ended September 30, 2020 is generally lower relative to loans acquired prior to the onset of COVID-19.~~

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

There were 0 modifications to the terms of dealer loan contracts that constituted troubled debt restructurings during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019. The Company generally does not grant concessions on consumer finance receivables that are considered troubled debt restructurings other than modifications of retail loans in reorganization proceedings pursuant to the U.S. Bankruptcy Code. Retail loans modified under bankruptcy protection were not material to the Company’s consolidated financial statements during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019. The Company does allow limited payment deferrals on consumer finance receivables. These payment deferrals are not treated as troubled debt restructurings since the deferrals are deemed insignificant and interest continues to accrue during the deferral period. Payment deferrals ~~were~~have also been granted to certain customers impacted by COVID-19 beginning in mid-March 2020. Through the end of ~~September~~December 2020, a cumulative total of approximately ~~240,000~~259,000 retail loans ~~were~~have been granted payment deferrals. As of ~~September 30,~~December 31, 2020, approximately 15,000 outstanding retail loans were still within their deferral periods. The deferral period is up to a maximum of 3 months in the United States and 4 months in Canada, generally from the date the customer was initially granted the deferral. Customers taking advantage of the deferrals ~~were~~are not considered delinquent during such deferral periods and therefore were not reflected in delinquency measures.

Delinquencies

Collection experience provides an indication of the credit quality of finance receivables. For retail loans, delinquencies are a good predictor of charge-offs in the near term. The likelihood of accounts charging off is significantly higher once an account becomes 60 days delinquent. Retail loans are considered delinquent if more than 10% of a scheduled payment is contractually past due on a cumulative basis. Dealer loans are considered delinquent when any payment is contractually past due. The following is an aging analysis of past due finance receivables:


		30 – 59 days past due		60 – 89 days past due		90 days or greater past due		Total past due		Current or less than 30 days past due		Total finance receivables			30 – 59 days past due		60 – 89 days past due		90 days or greater past due		Total past due		Current or less than 30 days past due		Total finance receivables

		(U.S. dollars in millions)													(U.S. dollars in millions)
September 30, 2020
December 31, 2020														December 31, 2020
Retail loans:	Retail loans:													Retail loans:
New auto	New auto	$	166	$	50	$	13	$	229	$	29,145	$	29,374	New auto	$	231	$	67	$	13	$	311	$	29,686	$	29,997
Used and certified auto	Used and certified auto	63		20		5		88		5,370		5,458		Used and certified auto	89		27		5		121		5,305		5,426
Motorcycle and other	Motorcycle and other	12		4		2		18		1,454		1,472		Motorcycle and other	15		6		3		24		1,468		1,492
Total retail	Total retail	241		74		20		335		35,969		36,304		Total retail	335		100		21		456		36,459		36,915
Dealer loans:	Dealer loans:													Dealer loans:
Wholesale flooring	Wholesale flooring	0		0		1		1		2,791		2,792		Wholesale flooring	3		0		0		3		3,336		3,339
Commercial loans	Commercial loans	0		0		0		0		889		889		Commercial loans	0		0		0		0		939		939
Total dealer loans	Total dealer loans	0		0		1		1		3,680		3,681		Total dealer loans	3		0		0		3		4,275		4,278
Total finance receivables	Total finance receivables	$	241	$	74	$	21	$	336	$	39,649	$	39,985	Total finance receivables	$	338	$	100	$	21	$	459	$	40,734	$	41,193

March 31, 2020	March 31, 2020													March 31, 2020
Retail loans:	Retail loans:													Retail loans:
New auto	New auto	$	222	$	50	$	13	$	285	$	27,495	$	27,780	New auto	$	222	$	50	$	13	$	285	$	27,495	$	27,780
Used and certified auto	Used and certified auto	84		20		5		109		5,174		5,283		Used and certified auto	84		20		5		109		5,174		5,283
Motorcycle and other	Motorcycle and other	12		4		2		18		1,237		1,255		Motorcycle and other	12		4		2		18		1,237		1,255
Total retail	Total retail	318		74		20		412		33,906		34,318		Total retail	318		74		20		412		33,906		34,318
Dealer loans:	Dealer loans:													Dealer loans:
Wholesale flooring	Wholesale flooring	1		0		0		1		4,529		4,530		Wholesale flooring	1		0		0		1		4,529		4,530
Commercial loans	Commercial loans	0		0		0		0		1,076		1,076		Commercial loans	0		0		0		0		1,076		1,076
Total dealer loans	Total dealer loans	1		0		0		1		5,605		5,606		Total dealer loans	1		0		0		1		5,605		5,606
Total finance receivables	Total finance receivables	$	319	$	74	$	20	$	413	$	39,511	$	39,924	Total finance receivables	$	319	$	74	$	20	$	413	$	39,511	$	39,924

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Credit Quality Indicators

Credit losses are an expected cost of extending credit. The majority of our credit risk is with consumer financing and to a lesser extent with dealer financing. Exposure to credit risk in retail loans is managed through regular monitoring and adjusting of underwriting standards, pricing of contracts for expected losses, and focusing collection efforts to minimize losses. Exposure to credit risk for dealers is managed through ongoing reviews of their financial condition.

Retail Loan Segment

The Company utilizes proprietary credit scoring systems to evaluate the credit risk of applicants and assign internal credit grades at origination. Factors used to develop a customer’s credit grade include the terms of the contract, the loan-to-value ratio, the customer’s debt ratios, and credit bureau attributes such as the number of trade lines, utilization ratio, and number of credit inquiries. Different scorecards are utilized depending on the type of product financed. The Company regularly reviews and analyzes the performance of the consumer-financing portfolio to ensure the effectiveness of underwriting guidelines, purchasing criteria and scorecard predictability of customers. Internal credit grades are determined only at the time of origination and are not reassessed during the life of the contract. The following describes the internal credit grade ratings.

A - Borrowers classified as very low credit risks. Based on their application and credit bureau report, they have the ability to pay and have shown a willingness to pay. Generally, A credit borrowers have an extensive credit history, an excellent payment record and extensive financial resources.

B - Borrowers classified as relatively low credit risks. Based on their application and credit bureau report, they have the ability to pay and have shown a willingness to pay. Generally, B credit borrowers may have one or more conditions that could reduce the internal credit score, such as a shorter credit history or a minor credit weakness.

C - Borrowers classified as moderate credit risks. Based on their application and credit bureau report, they may have limited financial resources, limited credit history, or a weakness in credit history.

D - Borrowers classified as relatively higher credit risks. Based on their application and credit bureau report, they may have very limited financial resources, very limited or no credit history, or a poor credit history.

Others - Borrowers, including businesses, without credit bureau reports.

The following table summarizes the amortized cost of retail loans by internal credit grade:


		Retail loans by vintage fiscal year															Retail loans by vintage fiscal year

		2021		2020		2019		2018		2017		Prior		Total			2021		2020		2019		2018		2017		Prior		Total

		(U.S. dollars in millions)															(U.S. dollars in millions)
Credit grade A	Credit grade A	$	6,281	$	6,750	$	5,303	$	2,834	$	1,289	$	316	$	22,773	Credit grade A	$	8,924	$	6,081	$	4,639	$	2,404	$	1,001	$	211	$	23,260
Credit grade B	Credit grade B	1,624		1,835		1,286		863		399		136		6,143		Credit grade B	2,288		1,675		1,140		745		326		95		6,269
Credit grade C	Credit grade C	1,145		1,538		999		685		311		109		4,787		Credit grade C	1,633		1,392		880		593		258		76		4,832
Credit grade D	Credit grade D	342		741		452		287		131		54		2,007		Credit grade D	489		671		401		250		111		40		1,962
Others	Others	127		190		134		80		48		15		594		Others	181		172		120		69		40		10		592
Total retail loans	Total retail loans	$	9,519	$	11,054	$	8,174	$	4,749	$	2,178	$	630	$	36,304	Total retail loans	$	13,515	$	9,991	$	7,180	$	4,061	$	1,736	$	432	$	36,915

Dealer Loan Segment

The Company utilizes an internal risk rating system to evaluate dealer credit risk. Dealerships are assigned an internal risk rating based on an assessment of their financial condition and other factors. Factors including liquidity, financial strength, management effectiveness, and operating efficiency, are evaluated when assessing their financial condition. Financing limits and interest rates are based upon these risk ratings. Monitoring activities including financial reviews and inventory inspections are performed more frequently for dealerships with weaker risk ratings. The financial conditions of dealerships are reviewed and their risk ratings are updated at least annually.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Dealerships have been divided into the following groups:

Group I - Dealerships in the strongest internal risk rating tier

Group II - Dealerships with internal risk ratings below the strongest tier

Group III - Dealerships with impaired loans

The following table summarizes the amortized cost of dealer loans by risk rating groups:


		Commercial loans by vintage fiscal year																			Commercial loans by vintage fiscal year

		2021		2020		2019		2018		2017		Prior		Revolving loans		Wholesale Flooring		Total			2021		2020		2019		2018		2017		Prior		Revolving loans		Wholesale Flooring		Total
		(U.S. dollars in millions)																			(U.S. dollars in millions)
Group I	Group I	$	144	$	66	$	7	$	44	$	46	$	88	$	284	$	1,341	$	2,020	Group I	$	145	$	65	$	7	$	44	$	45	$	86	$	337	$	1,580	$	2,309
Group II	Group II	40		35		34		31		33		37		0		1,450		1,660		Group II	48		35		34		31		33		29		0		1,754		1,964
Group III	Group III	0		0		0		0		0		0		0		1		1		Group III	0		0		0		0		0		0		0		5		5
Total dealer loans	Total dealer loans	$	184	$	101	$	41	$	75	$	79	$	125	$	284	$	2,792	$	3,681	Total dealer loans	$	193	$	100	$	41	$	75	$	78	$	115	$	337	$	3,339	$	4,278

Note 3. Investment in Operating Leases

Investment in operating leases consisted of the following:


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020

		(U.S. dollars in millions)					(U.S. dollars in millions)
Operating lease vehicles	Operating lease vehicles	$	44,199	$	43,624	Operating lease vehicles	$	44,886	$	43,624
Accumulated depreciation	Accumulated depreciation	(8,480)		(8,219)		Accumulated depreciation	(8,624)		(8,219)
Deferred dealer participation and initial direct costs	Deferred dealer participation and initial direct costs	130		131		Deferred dealer participation and initial direct costs	131		131
Unearned subsidy income	Unearned subsidy income	(1,245)		(1,376)		Unearned subsidy income	(1,184)		(1,376)
Estimated early termination losses	Estimated early termination losses	(166)		(317)		Estimated early termination losses	(131)		(317)
Investment in operating leases, net	Investment in operating leases, net	$	34,438	$	33,843	Investment in operating leases, net	$	35,078	$	33,843

Operating lease revenue consisted of the following:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
Lease payments	Lease payments	$	1,687	$	1,669	$	3,362	$	3,306	Lease payments	$	1,715	$	1,697	$	5,077	$	5,003
Subsidy income and dealer rate participation, net	Subsidy income and dealer rate participation, net	232		245		452		491		Subsidy income and dealer rate participation, net	225		241		677		732
Reimbursed lessor costs	Reimbursed lessor costs	23		21		33		33		Reimbursed lessor costs	11		14		44		47
Total operating lease revenue, net	Total operating lease revenue, net	$	1,942	$	1,935	$	3,847	$	3,830	Total operating lease revenue, net	$	1,951	$	1,952	$	5,798	$	5,782

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Leased vehicle expenses consisted of the following:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
Depreciation expense	Depreciation expense	$	1,416	$	1,421	$	2,832	$	2,827	Depreciation expense	$	1,418	$	1,448	$	4,250	$	4,275
Initial direct costs and other lessor costs	Initial direct costs and other lessor costs	42		41		70		70		Initial direct costs and other lessor costs	30		32		100		102
Gain on disposition of leased vehicles (1)	Gain on disposition of leased vehicles (1)	(97)		(53)		(105)		(96)		Gain on disposition of leased vehicles (1)	(57)		(17)		(162)		(113)
Total leased vehicle expenses, net	Total leased vehicle expenses, net	$	1,361	$	1,409	$	2,797	$	2,801	Total leased vehicle expenses, net	$	1,391	$	1,463	$	4,188	$	4,264

________________________

(1)Included in the gain on disposition of leased vehicles are end of term charges of ~~$14~~$10 million and ~~$18~~$12 million for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and ~~$33~~$43 million and ~~$46~~$58 million for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively.

Investment in operating leases includes lease assets with a net carrying amount of ~~$472~~$465 million and $493 million as of ~~September 30,~~December 31, 2020 and March 31, 2020, respectively, which have been transferred to SPEs and are considered to be legally isolated but do not qualify for sale accounting treatment. These investments in operating leases are restricted and serve as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.

Contractual operating lease payments due as of ~~September 30,~~December 31, 2020 are summarized below. Based on the Company's experience, it is expected that a portion of the Company's operating leases will terminate prior to the scheduled lease term. The summary below should not be regarded as a forecast of future cash collections.


Twelve month periods ending September 30,		(U.S. dollars in millions)
Twelve month periods ending December 31,				Twelve month periods ending December 31,	(U.S. dollars in millions)

2021	2021	$	5,829	2021	$	5,865
2022	2022	3,940		2022	3,903
2023	2023	1,529		2023	1,571
2024	2024	254		2024	275
2025	2025	54		2025	62
Total	Total	$	11,606	Total	$	11,676

The Company recognized a reversal of early termination losses on operating leases of ~~$59~~$18 million and ~~$115~~$133 million during the three and ~~six~~nine months ended ~~September 30,~~December 31, 2020, respectively, and recognized early termination losses of ~~$36~~$37 million and ~~$60~~$97 million during the three and ~~six~~nine months ended ~~September 30,~~December 31, 2019, respectively. Actual net losses realized totaled $3$17 million and ~~$32~~$37 million for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and ~~$36~~$53 million and ~~$56~~$93 million for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively.

The general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $7$9 million for both the three months ended ~~September 30,~~December 31, 2020 and 2019, and ~~$21~~$30 million and ~~$13~~$22 million during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively.

During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, the Company considered the impact of COVID-19 on estimated residual values and determined that impairment conditions were not met. NaN impairment losses due to declines in estimated residual values were recognized during the three and ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 4. Debt

The Company issues debt in various currencies with both floating and fixed interest rates. Outstanding debt net of discounts and fees, weighted average contractual interest rates and range of contractual interest rates were as follows:


						Weighted average contractual interest rate				Contractual interest rate ranges							Weighted average contractual interest rate				Contractual interest rate ranges
		September 30, 2020		March 31, 2020		September 30, 2020		March 31, 2020		September 30, 2020	March 31, 2020		December 31, 2020		March 31, 2020		December 31, 2020		March 31, 2020		December 31, 2020	March 31, 2020

		(U.S. dollars in millions)											(U.S. dollars in millions)
Unsecured debt:	Unsecured debt:											Unsecured debt:
Commercial paper	Commercial paper	$	4,353	$	5,490	0.47	%	1.81	%	0.23 - 1.13%	1.01 - 2.31%	Commercial paper	$	6,785	$	5,490	0.37	%	1.81	%	0.25 - 0.71%	1.01 - 2.31%
Related party debt	Related party debt	375		533		0.54	%	1.76	%	0.51 - 0.56%	1.45 - 2.06%	Related party debt	393		533		0.54	%	1.76	%	0.51 - 0.56%	1.45 - 2.06%
Bank loans	Bank loans	4,980		4,938		1.08	%	2.16	%	0.86 - 1.44%	1.44 - 2.55%	Bank loans	4,535		4,938		1.09	%	2.16	%	0.87 - 1.44%	1.44 - 2.55%
Private MTN program	Private MTN program	500		999		3.80	%	3.84	%	3.80 - 3.80%	3.80 - 3.88%	Private MTN program	500		999		3.80	%	3.84	%	3.80 - 3.80%	3.80 - 3.88%
Public MTN program	Public MTN program	27,056		25,130		1.66	%	2.07	%	0.35 - 3.63%	0.35 - 3.63%	Public MTN program	28,146		25,130		1.61	%	2.07	%	0.33 - 3.63%	0.35 - 3.63%
Euro MTN programme	Euro MTN programme	28		28		2.23	%	2.23	%	2.23 - 2.23%	2.23 - 2.23%	Euro MTN programme	29		28		2.23	%	2.23	%	2.23 - 2.23%	2.23 - 2.23%
Other debt	Other debt	3,635		3,266		2.18	%	2.47	%	0.79 - 3.44%	1.73 - 3.44%	Other debt	3,570		3,266		2.27	%	2.47	%	0.80 - 3.44%	1.73 - 3.44%
Total unsecured debt	Total unsecured debt	40,927		40,384								Total unsecured debt	43,958		40,384
Secured debt	Secured debt	10,363		9,748		1.62	%	2.25	%	0.19 - 3.30%	1.36 - 3.30%	Secured debt	8,813		9,748		1.59	%	2.25	%	0.19 - 3.30%	1.36 - 3.30%
Total debt	Total debt	$	51,290	$	50,132							Total debt	$	52,771	$	50,132

As of ~~September 30,~~December 31, 2020, the outstanding principal balance of long-term debt with floating interest rates totaled ~~$11.5~~$10.5 billion, long-term debt with fixed interest rates totaled ~~$34.0~~$34.4 billion, and short-term debt with floating and fixed interest rates totaled ~~$5.8~~$7.9 billion. As of March 31, 2020, the outstanding principal balance of long-term debt with floating interest rates totaled $13.0 billion, long-term debt with fixed interest rates totaled $30.0 billion, and short-term debt with floating and fixed interest rates totaled $7.3 billion.

Commercial Paper

As of ~~September 30,~~December 31, 2020 and March 31, 2020, the Company had commercial paper programs that provide the Company with available funds of up to ~~$8.9~~$9.0 billion and $8.8 billion, respectively, at prevailing market interest rates for terms up to one year. The commercial paper programs are supported by the Keep Well Agreements with HMC described in Note 6.

Outstanding commercial paper averaged ~~$4.9~~$5.1 billion and ~~$5.5~~$5.6 billion during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively. The maximum balance outstanding at any month-end during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019 was ~~$5.9~~$6.8 billion and $6.2 billion, respectively.

Related Party Debt

HCFI issues fixed rate short-term notes to HCI to help fund HCFI’s general corporate operations. HCFI incurred interest expense on these notes totaling $1$0.4 million and $4$3 million for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and $2 million and $8$11 million for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively.

Bank Loans

Outstanding bank loans at ~~September 30,~~December 31, 2020 were either short-term or long-term, with floating or fixed interest rates, and denominated in U.S. dollars or Canadian dollars. Outstanding bank loans have prepayment options. No outstanding bank loans as of ~~September 30,~~December 31, 2020 were supported by the Keep Well Agreements with HMC described in Note 6. Outstanding bank loans contain certain covenants, including limitations on liens, mergers, consolidations and asset sales.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Medium-Term Note (MTN) Programs

Private MTN Program

AHFC no longer issues MTNs under its Rule 144A Private MTN Program. AHFC has 1 note outstanding under the Private MTN Program as of ~~September 30,~~December 31, 2020. The note is long-term, with a fixed interest rate and a maturity date of September 20, 2021, and denominated in U.S. dollars. Notes under this program were issued pursuant to the terms of an issuing and paying agency agreement which contains certain covenants, including negative pledge provisions.

Public MTN Program

In August 2019, AHFC renewed its Public MTN program by filing a registration statement with the SEC under which it may issue from time to time up to $30.0 billion aggregate principal amount of Public MTNs pursuant to the Public MTN program. The aggregate principal amount of MTNs offered under this program may be increased from time to time. Notes outstanding under the Public MTN program as of ~~September 30,~~December 31, 2020 were long-term, with either fixed or floating interest rates, and denominated in U.S. dollars, Euro or Sterling. Notes under this program are issued pursuant to an indenture which contains certain covenants, including negative pledge provisions and limitations on mergers, consolidations and asset sales.

Euro MTN Programme

The Euro MTN Programme was retired in August 2014. AHFC has 1 note outstanding under this program as of ~~September 30,~~December 31, 2020. The note has a maturity date of February 21, 2023, a fixed interest rate and is not listed on the Luxembourg Stock Exchange. The note was issued pursuant to the terms of an agency agreement which contains certain covenants, including negative pledge provisions.

The MTN programs are supported by the Keep Well Agreement with HMC described in Note 6.

Other Debt

The outstanding balances as of ~~September 30,~~December 31, 2020 consisted of private placement debt issued by HCFI which are long-term, with either fixed or floating interest rates, and denominated in Canadian dollars. Private placement debt is supported by the Keep Well Agreement with HMC described in Note 6. The notes are issued pursuant to the terms of an indenture which contain certain covenants, including negative pledge provisions.

Secured Debt

The Company issues notes through financing transactions that are secured by assets held by issuing SPEs. Notes outstanding as of ~~September 30,~~December 31, 2020 were long-term and short-term with either fixed or floating interest rates, and denominated in U.S. dollars or Canadian dollars. Repayment of the notes is dependent on the performance of the underlying retail loans and operating leases. Refer to Note 9 for additional information on the Company’s secured financing transactions.

Credit Agreements

Syndicated Bank Credit Facilities

AHFC maintains a $7.0 billion syndicated bank credit facility that includes a $3.5 billion credit agreement, which expires on February 26, 2021, a $2.1 billion credit agreement, which expires on February 28, 2023, and a $1.4 billion credit agreement, which expires on February 28, 2025. As of ~~September 30,~~December 31, 2020, 0 amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.

~~AMERICAN HONDA FINANCE CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

HCFI maintains a ~~$1.5~~$1.6 billion syndicated bank credit facility which provides that HCFI may borrow up to ~~$751~~$786 million on a one-year revolving basis and up to ~~$751~~$786 million on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 2021 and the five-year tranche of the credit agreement expires on March 25, 2025. As of ~~September 30,~~December 31, 2020, 0 amounts were drawn upon under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the expiration date of each respective tranche.

The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales and affiliate transactions. Loans, if any, under the credit agreements will be supported by the Keep Well Agreement described in Note 6.

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Other Credit Agreements

AHFC maintains other committed lines of credit that allow the Company access to an additional $1.0 billion in unsecured funding with two banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales. As of ~~September 30,~~December 31, 2020, 0 amounts were drawn upon under these agreements. These agreements expire in September 2021. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates.

~~AMERICAN HONDA FINANCE CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

Note 5. Derivative Instruments

The notional balances and fair values of the Company’s derivatives are presented below. The derivative instruments are presented on a gross basis in the Company’s consolidated balance sheets. Refer to Note 13 regarding the valuation of derivative instruments.


		September 30, 2020						March 31, 2020							December 31, 2020						March 31, 2020
		Notional balances		Assets		Liabilities		Notional balances		Assets		Liabilities			Notional balances		Assets		Liabilities		Notional balances		Assets		Liabilities

		(U.S. dollars in millions)													(U.S. dollars in millions)
Interest rate swaps	Interest rate swaps	$	60,730	$	714	$	764	$	57,379	$	704	$	830	Interest rate swaps	$	63,047	$	683	$	641	$	57,379	$	704	$	830
Cross currency swaps	Cross currency swaps	5,638		349		58		4,001		44		142		Cross currency swaps	6,303		587		26		4,001		44		142
Gross derivative assets/liabilities	Gross derivative assets/liabilities			1,063		822				748		972		Gross derivative assets/liabilities			1,270		667				748		972
Collateral posted/held	Collateral posted/held			45		11				45		9		Collateral posted/held			41		12				45		9
Counterparty netting adjustment	Counterparty netting adjustment			(752)		(752)				(764)		(764)		Counterparty netting adjustment			(630)		(630)				(764)		(764)
Net derivative assets/liabilities	Net derivative assets/liabilities			$	356	$	81			$	29	$	217	Net derivative assets/liabilities			$	681	$	49			$	29	$	217

The income statement impact of derivative instruments is presented below. There were no derivative instruments designated as part of a hedge accounting relationship during the periods presented.


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
Interest rate swaps	Interest rate swaps	$	(6)	$	31	$	(15)	$	(45)	Interest rate swaps	$	(20)	$	(17)	$	(35)	$	(62)
Cross currency swaps	Cross currency swaps	238		(205)		340		(160)		Cross currency swaps	279		93		619		(67)
Total gain/(loss) on derivative instruments	Total gain/(loss) on derivative instruments	$	232	$	(174)	$	325	$	(205)	Total gain/(loss) on derivative instruments	$	259	$	76	$	584	$	(129)

The fair value of derivative instruments is subject to the fluctuations in market interest rates and foreign currency exchange rates. Since the Company has elected not to apply hedge accounting, the volatility in the changes in fair value of these derivative instruments is recognized in earnings. All settlements of derivative instruments are presented within cash flows from operating activities in the consolidated statements of cash flows.

These derivative instruments also contain an element of credit risk in the event the counterparties are unable to meet the terms of the agreements. However, the Company minimizes the risk exposure by limiting the counterparties to major financial institutions that meet established credit guidelines. In the event of default, all counterparties are subject to legally enforceable master netting agreements. In Canada, HCFI is a party to reciprocal credit support agreements that require posting of cash collateral to mitigate counterparty credit risk on derivative positions. Posted collateral is recognized in other assets and held collateral is recognized in other liabilities.

1716

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 6. Transactions Involving Related Parties

The following tables summarize the income statement and balance sheet impact of transactions with the Parent and affiliated companies:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
Income Statement	Income Statement	2020		2019		2020		2019		Income Statement	2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
Revenue:	Revenue:									Revenue:
Subsidy income	Subsidy income	$	381	$	418	$	740	$	845	Subsidy income	$	372	$	404	$	1,112	$	1,249
Interest expense:	Interest expense:									Interest expense:
Related party debt	Related party debt	1		4		2		8		Related party debt	0		3		2		11
Other income, net:	Other income, net:									Other income, net:
VSC administration fees	VSC administration fees	27		28		53		55		VSC administration fees	26		27		79		82
Support Service Fee	Support Service Fee	(12)		(9)		(23)		(18)		Support Service Fee	(11)		(9)		(34)		(27)
General and administrative expenses:	General and administrative expenses:									General and administrative expenses:
Support Compensation Agreement fees	Support Compensation Agreement fees	18		17		35		34		Support Compensation Agreement fees	18		17		53		51
Benefit plan expenses	Benefit plan expenses	2		3		4		5		Benefit plan expenses	2		2		6		7
Shared services	Shared services	17		19		35		35		Shared services	17		17		52		52
Lease expense										Lease expense	1		0		1		0


Balance Sheet	Balance Sheet	September 30, 2020		March 31, 2020		Balance Sheet	December 31, 2020		March 31, 2020

		(U.S. dollars in millions)					(U.S. dollars in millions)
Assets:	Assets:					Assets:
Finance receivables, net:	Finance receivables, net:					Finance receivables, net:
Unearned subsidy income	Unearned subsidy income	$	(801)	$	(738)	Unearned subsidy income	$	(803)	$	(738)
Investment in operating leases, net:	Investment in operating leases, net:					Investment in operating leases, net:
Unearned subsidy income	Unearned subsidy income	(1,242)		(1,372)		Unearned subsidy income	(1,180)		(1,372)
Due from Parent and affiliated companies	Due from Parent and affiliated companies	136		93		Due from Parent and affiliated companies	126		93
Liabilities:	Liabilities:					Liabilities:
Debt:	Debt:					Debt:
Related party debt	Related party debt	$	375	$	533	Related party debt	$	393	$	533
Due to Parent and affiliated companies	Due to Parent and affiliated companies	111		72		Due to Parent and affiliated companies	131		72
Accrued interest expense:
Related party debt		0		1
Other liabilities:	Other liabilities:					Other liabilities:
Accrued interest expense						Accrued interest expense	0		1
Unearned VSC administrative fees	Unearned VSC administrative fees	347		363		Unearned VSC administrative fees	339		363
Accrued benefit expenses	Accrued benefit expenses	72		69		Accrued benefit expenses	59		69
Operating lease liabilities						Operating lease liabilities	21		0

1817

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Support Agreements

HMC and AHFC are parties to a Keep Well Agreement, effective as of September 9, 2005. This Keep Well Agreement provides that HMC will (1) maintain (directly or indirectly) at least 80% ownership in AHFC’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of AHFC that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause AHFC to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with GAAP, and (3) ensure that AHFC has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to AHFC, or HMC shall procure for AHFC, sufficient funds to enable AHFC to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.

HMC and HCFI are parties to a Keep Well Agreement effective as of September 26, 2005. This Keep Well Agreement provides that HMC will (1) maintain (directly or indirectly) at least 80% ownership in HCFI’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of HCFI that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause HCFI to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with generally accepted accounting principles in Canada, and (3) ensure that HCFI has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to HCFI, or HMC shall procure for HCFI, sufficient funds to enable HCFI to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.

Debt programs supported by the Keep Well Agreements consist of the Company’s commercial paper programs, Private MTN Program, Public MTN Program, Euro MTN Programme, and HCFI’s private placement debt and loans, if any, under AHFC's syndicated bank credit facilities. In connection with the above agreements, AHFC and HCFI have entered into separate Support Compensation Agreements, where each has agreed to pay HMC a quarterly fee based on the amount of outstanding debt that benefit from the Keep Well Agreements. Support Compensation Agreement fees are recognized in general and administrative expenses.

Incentive Financing Programs

The Company receives subsidy payments from AHM and HCI, which supplement the revenues on financing products offered under incentive programs. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The unearned balance is recognized as reductions to the carrying value of finance receivables and investment in operating leases. Subsidy payments on dealer loans are received as earned.

Related Party Debt

HCFI issues short-term notes to HCI to fund HCFI’s general corporate operations. Interest rates are based on prevailing rates of debt with comparable terms. Refer to Note 4 for additional information.

Vehicle Service Contract (VSC) Administration

AHFC performs administrative services for VSCs issued by certain subsidiaries of AHM. AHFC’s performance obligations for the services are satisfied over the term of the underlying contracts and revenue is recognized proportionate to the anticipated amount of services to be performed. Contract terms range between two and nine years with the majority of contracts having original terms between four and eight years. The majority of the administrative service revenue is recognized during the latter years of the underlying contracts as this is the period in which the majority of VSC claims are processed. AHFC receives fees for performing the administrative services when the contracts are acquired.

Unearned VSC administration fees represent AHFC’s contract liabilities and are included in other liabilities (Note 11). VSC administration income is recognized in other income, net (Note 12). HCFI receives fees for marketing VSCs issued by HCI. These fees are also recognized in other income, net.

AHFC pays fees to AHM for services provided in support of AHFC’s performance of VSC administrative services. The support fees are recognized as an expense within other income, net (Note 12).

1918

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Shared Services

The Company shares certain common expenditures with AHM, HCI, and other related parties including information technology services and facilities. The allocated costs for shared services are included in general and administrative expenses.

Benefit Plans

The Company participates in various employee benefit plans that are sponsored by AHM and HCI. The allocated benefit plan expenses are included in general and administrative expenses.

Income taxes

The Company’s U.S. income taxes are recognized on a modified separate return basis pursuant to an intercompany income tax allocation agreement with AHM. Income tax related items are not included in the tables above. Refer to Note 7 for additional information.

Other

AHM periodically sponsors programs that allow lessees to terminate their lease contracts prior to the contractual maturity date. AHM compensates the Company for rental payments that were waived under these programs. During the three months ended ~~September 30,~~December 31, 2020 and 2019, the Company recognized $2 million and $3 million, respectively, and during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, the Company recognized $5$7 million and $6$9 million, respectively, under these programs which were reflected as proceeds on the disposition of the returned lease vehicles.

The majority of the amounts due from the Parent and affiliated companies at ~~September 30,~~December 31, 2020 and March 31, ~~2019~~2020 related to incentive financing program subsidies. The majority of the amounts due to the Parent and affiliated companies at ~~September 30,~~December 31, 2020 and March 31, ~~2019~~2020 related to wholesale flooring payable to the Parent. These receivable and payable accounts are non-interest-bearing and short-term in nature and are expected to be settled in the normal course of business.

Effective October 1, 2020, AHFC leases certain premises from its parent, AHM.

In July 2020 and August 2019, AHFC declared and paid cash dividends of $143 million and $292 million, respectively, to its parent, AHM.

2019

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 7. Income Taxes

The Company's effective tax rate was ~~27.3%~~22.3% and ~~25.8%,~~26.4% for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and ~~26.4%~~25.0% and ~~28.4%~~27.8% for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively. The ~~increase~~decrease in the comparable effective tax rate for the three months and nine months ended ~~September 30,~~December 31, 2020 was primarily due to changes in the U.S. state ~~taxes. The reduction in the effective tax rate forthe six months ended September 30, 2020~~ ~~was~~ ~~primarily due to changes in~~jurisdictional mix and non-recurring unrecognized tax ~~benefits in the six months ended~~ ~~September 30, 2019,~~ ~~offset in part by an increase in state taxes.~~benefits.

The Company does not provide for income taxes on its share of the undistributed earnings of HCFI which are intended to be indefinitely reinvested outside the United States. At ~~September 30,~~December 31, 2020, ~~$976 million~~$1 billion of accumulated undistributed earnings of HCFI were intended to be so reinvested. If the undistributed earnings as of ~~September 30,~~December 31, 2020 were distributed, the tax liability associated with these earnings would be ~~$47~~$57 million, inclusive of currency translation adjustments.

During the quarter ended December 31, 2020, the Company reduced previously unrecognized tax benefits as a result of a change in the tax accounting method filed with the Internal Revenue Service to change the timing of certain income recognition. This reduction had no material net impact on the Company's total tax expense for the period.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which provides economic relief in response to the coronavirus pandemic. The CARES Act, among other things, includes provisions to allow certain net operating losses to be carried-back up to five years, to increase interest deduction limitations, and to make technical corrections to tax depreciation methods for qualified improvement property. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act (CAA), which provides additional economic relief in response to the ongoing coronavirus pandemic. During the ~~six months~~period ended ~~September 30,~~December 31, 2020, ~~several~~additional U.S. states enacted legislation to respond to various provisions of the CARES Act. The Company evaluated the impact of new tax laws according to the Company’s modified separate return basis pursuant to an intercompany income tax allocation agreement with the Parent, and concluded there was no material impact on the Company’s ~~September 30,~~December 31, 2020 income tax accounts.

As of ~~September 30,~~December 31, 2020, the Company is subject to examination in various U.S. tax jurisdictions for returns filed for the taxable years ended March 31, 2008 through 2020. The Company’s Canadian subsidiary, HCFI, is subject to examination for returns filed for the taxable years ended March 31, ~~2013~~2014 through 2020, federally, and returns filed for the taxable years ended March 31, 2008 through 2020, except for 2011 and 2012, provincially. The Company believes appropriate provisions have been made for all outstanding issues for all open ~~years and does not expect any material changes in the amounts of unrecognized tax benefits during the fiscal year ending March 31, 2021.~~years.

2120

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 8. Commitments and Contingencies

Operating Leases

The Company leases certain premises and equipment through operating leases. AHFC leases its premises and equipment from third parties and HCFI leases its premises from HCI. Effective October 1, 2020, AHFC leases certain premises from its parent, AHM. ~~The lease has a total of $24 million in undiscounted future payments over the eight year lease term.~~

Many of the Company's leases contain renewal options, and generally have no residual value guarantees or material covenants. When it is reasonably certain that the Company will exercise the option to renew a lease, the Company will include the renewal option in the evaluation of the lease term. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with a lease term of less than one year. As most of the Company's leases do not provide an implicit rate, the incremental borrowing rate is used in determining the present value of lease payments. The right-of-use assets in operating lease arrangements are reported in other assets on the Company's consolidated balance sheets.

Operating lease liabilities are reported in other liabilities on the Company's consolidated balance sheets. At ~~September 30,~~December 31, 2020, maturities of operating lease liabilities were as follows:


Twelve month periods ending September 30,		(U.S. dollars in millions)
Twelve month periods ending December 31,				Twelve month periods ending December 31,	(U.S. dollars in millions)

2021	2021	$	10	2021	$	9
2022	2022	9		2022	8
2023	2023	8		2023	7
2024	2024	8		2024	6
2025	2025	6		2025	5
Thereafter	Thereafter	15		Thereafter	8
Total undiscounted future lease obligations	Total undiscounted future lease obligations	56		Total undiscounted future lease obligations	43
Less: imputed interest	Less: imputed interest	(5)		Less: imputed interest	(4)
Operating lease liabilities	Operating lease liabilities	$	51	Operating lease liabilities	$	39

~~Rent~~Lease expense under operating leases was $3$2 million and $2$3 million for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and $5$7 million and $8 million for ~~both~~ the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and ~~2019.~~2019, respectively. Rent expense is included within general and administrative expenses.

As of ~~September 30,~~December 31, 2020, the weighted average remaining lease term for operating leases was ~~6.6~~5.7 years and the weighted average remaining discount rate for operating leases was ~~3.06%~~2.86%.

Revolving Lines of Credit to Dealerships

The Company extends commercial revolving lines of credit to dealerships to support their business activities including facilities refurbishment and general working capital requirements. The amounts borrowed are generally secured by the assets of the borrowing entity. The unused balance of commercial revolving lines of credit was ~~$562~~$532 million as of ~~September 30,~~December 31, 2020. The Company also has commitments to finance the construction of auto dealership facilities. The remaining unfunded balance for these construction loans was $5 million as of ~~September 30,~~December 31, 2020.

Legal Proceedings and Regulatory Matters

The Company establishes accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When able, the Company will determine estimates of reasonably possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established.

2221

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The Company is involved, in the ordinary course of business, in various legal proceedings including claims of individual customers and purported class action lawsuits. Certain of these actions are similar to suits filed against other financial institutions and captive finance companies. Most of these proceedings concern customer allegations of wrongful repossession or defamation of credit. The Company is also subject to governmental reviews and inquiries from time to time. The Company has received 2 Civil Investigative Demands from the U.S. Department of Justice (DOJ) relating to the financing of motor vehicles by servicemembers under the Servicemembers Civil Relief Act. The Company is cooperating with the DOJ and is responding to their information requests. Based on available information and established accruals, management does not believe it is reasonably possible that the results of these proceedings, in the aggregate, will have a material adverse effect on the Company’s consolidated financial statements.

Note 9. Securitizations and Variable Interest Entities (VIE)

The Company utilizes SPEs for its asset-backed securitizations and these SPEs are considered VIEs, which are required to be consolidated by their primary beneficiary. The Company is considered to be the primary beneficiary of these SPEs due to (i) the power to direct the activities of the SPEs that most significantly impact the SPEs’ economic performance through the Company's role as servicer, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the SPEs through the subordinated certificates and residual interest retained. The debt securities issued by the SPEs to third-party investors along with the assets of the SPEs are included in the Company’s consolidated financial statements.

During the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, the Company issued notes through asset-backed securitizations, which were accounted for as secured financing transactions totaling $3.3 billion and ~~$2.8~~$4.7 billion, respectively. The notes were secured by assets with an initial balance of $3.5 billion and ~~$3.0~~$5.2 billion, respectively.

The table below presents the carrying amounts of assets and liabilities of consolidated SPEs as they are reported in the Company’s consolidated balance sheets. All amounts exclude intercompany balances, which have been eliminated upon consolidation. Investors in notes issued by a SPE only have recourse to the assets of such SPE and do not have recourse to the assets of AHFC, HCFI, or its other subsidiaries or to other SPEs. The assets of SPEs are the only source of funds for repayment on the notes.


		September 30, 2020											December 31, 2020

		Assets						Liabilities					Assets						Liabilities

		(U.S. dollars in millions)											(U.S. dollars in millions)
		Securitized assets		Restricted cash (1)		Other		Secured debt		Other			Securitized assets		Restricted cash (1)		Other		Secured debt		Other
Retail loan securitizations	Retail loan securitizations	$	10,297	$	514	$	17	$	9,981	$	6	Retail loan securitizations	$	8,724	$	421	$	15	$	8,440	$	4
Operating lease securitizations	Operating lease securitizations	472		1		2		382		2		Operating lease securitizations	465		1		2		373		2
Total	Total	$	10,769	$	515	$	19	$	10,363	$	8	Total	$	9,189	$	422	$	17	$	8,813	$	6

		March 31, 2020											March 31, 2020

		Assets						Liabilities					Assets						Liabilities

		(U.S. dollars in millions)											(U.S. dollars in millions)
		Securitized assets		Restricted cash (1)		Other		Secured debt		Other			Securitized assets		Restricted cash (1)		Other		Secured debt		Other
Retail loan securitizations	Retail loan securitizations	$	9,645	$	581	$	16	$	9,345	$	7	Retail loan securitizations	$	9,645	$	581	$	16	$	9,345	$	7
Operating lease securitizations	Operating lease securitizations	493		1		0		403		2		Operating lease securitizations	493		1		0		403		2
Total	Total	$	10,138	$	582	$	16	$	9,748	$	9	Total	$	10,138	$	582	$	16	$	9,748	$	9

________________________

(1)Included with other assets in the Company’s consolidated balance sheets (Note 10).

In their role as servicers, AHFC and HCFI collect payments on the underlying securitized assets on behalf of the SPEs. Cash collected during a calendar month is required to be remitted to the SPEs in the following month. AHFC and HCFI are not restricted from using the cash collected for their general purposes prior to the remittance to the SPEs. As of ~~September 30,~~December 31, 2020 and March 31, 2020, AHFC and HCFI had combined cash collections of ~~$561~~$536 million and $468 million, respectively, which were required to be remitted to the SPEs.

2322

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 10. Other Assets

Other assets consisted of the following:


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020

		(U.S. dollars in millions)					(U.S. dollars in millions)
Interest receivable and other assets	Interest receivable and other assets	$	101	$	107	Interest receivable and other assets	$	103	$	107
Vehicles held for disposition	Vehicles held for disposition	113		228		Vehicles held for disposition	152		228
Other receivables	Other receivables	239		172		Other receivables	212		172
Deferred expense	Deferred expense	99		105		Deferred expense	96		105
Software, net of accumulated amortization of $162 and $156 as of September 30, 2020 and March 31, 2020, respectively		24		23
Property and equipment, net of accumulated depreciation of $24 and $23 as of September 30, 2020 and March 31, 2020, respectively		4		4
Software, net of accumulated amortization of $165 and $156 as of December 31, 2020 and March 31, 2020, respectively						Software, net of accumulated amortization of $165 and $156 as of December 31, 2020 and March 31, 2020, respectively	24		23
Property and equipment, net of accumulated depreciation of $19 and $23 as of December 31, 2020 and March 31, 2020, respectively						Property and equipment, net of accumulated depreciation of $19 and $23 as of December 31, 2020 and March 31, 2020, respectively	2		4
Restricted cash	Restricted cash	515		582		Restricted cash	422		582
Operating lease assets	Operating lease assets	44		48		Operating lease assets	36		48
Like-kind exchange assets	Like-kind exchange assets	66		91		Like-kind exchange assets	68		91
Other miscellaneous assets	Other miscellaneous assets	12		18		Other miscellaneous assets	12		18
Total	Total	$	1,217	$	1,378	Total	$	1,127	$	1,378

Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets, which range from three to five years. General and administrative expenses include depreciation and amortization expense of $2$3 million and $3$2 million for the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and ~~$5 million and $6~~$8 million for both the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and ~~2019, respectively.~~2019.

Note 11. Other Liabilities

Other liabilities consisted of the following:


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020

		(U.S. dollars in millions)					(U.S. dollars in millions)
Dealer payables	Dealer payables	$	152	$	68	Dealer payables	$	147	$	68
Accrued interest expense	Accrued interest expense	152		138		Accrued interest expense	173		138
Accounts payable and accrued expenses	Accounts payable and accrued expenses	442		408		Accounts payable and accrued expenses	429		408
Lease security deposits	Lease security deposits	82		84		Lease security deposits	82		84
Unearned VSC administrative fees (Note 6)	Unearned VSC administrative fees (Note 6)	347		363		Unearned VSC administrative fees (Note 6)	339		363
Unearned income, operating leases	Unearned income, operating leases	332		358		Unearned income, operating leases	335		358
Operating lease liabilities	Operating lease liabilities	51		55		Operating lease liabilities	39		55
Uncertain tax positions	Uncertain tax positions	192		195		Uncertain tax positions	160		195
Other liabilities	Other liabilities	20		20		Other liabilities	21		20
Total	Total	$	1,770	$	1,689	Total	$	1,725	$	1,689

2423

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 12. Other Income, net

Other income consisted of the following:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
VSC administration fees (Note 6)	VSC administration fees (Note 6)	$	27	$	28	$	53	$	55	VSC administration fees (Note 6)	$	26	$	27	$	79	$	82
Other, net	Other, net	(10)		(5)		(24)		(12)		Other, net	(9)		(3)		(33)		(15)
Total	Total	$	17	$	23	$	29	$	43	Total	$	17	$	24	$	46	$	67

Note 13. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Nonperformance risk is also required to be reflected in the fair value measurement, including an entity’s own credit standing when measuring the fair value of a liability.

Recurring Fair Value Measurements

The following tables summarize the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis:

2524

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


		September 30, 2020									December 31, 2020
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total

		(U.S. dollars in millions)									(U.S. dollars in millions)
Assets:	Assets:									Assets:
Derivative instruments:	Derivative instruments:									Derivative instruments:
Interest rate swaps	Interest rate swaps	$	0	$	714	$	0	$	714	Interest rate swaps	$	0	$	683	$	0	$	683
Cross currency swaps	Cross currency swaps	0		349		0		349		Cross currency swaps	0		587		0		587
Total assets	Total assets	$	0	$	1,063	$	0	$	1,063	Total assets	$	0	$	1,270	$	0	$	1,270
Liabilities:	Liabilities:									Liabilities:
Derivative instruments:	Derivative instruments:									Derivative instruments:
Interest rate swaps	Interest rate swaps	$	0	$	764	$	0	$	764	Interest rate swaps	$	0	$	641	$	0	$	641
Cross currency swaps	Cross currency swaps	0		58		0		58		Cross currency swaps	0		26		0		26
Total liabilities	Total liabilities	$	0	$	822	$	0	$	822	Total liabilities	$	0	$	667	$	0	$	667

		March 31, 2020									March 31, 2020
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total

		(U.S. dollars in millions)									(U.S. dollars in millions)
Assets:	Assets:									Assets:
Derivative instruments:	Derivative instruments:									Derivative instruments:
Interest rate swaps	Interest rate swaps	$	0	$	704	$	0	$	704	Interest rate swaps	$	0	$	704	$	0	$	704
Cross currency swaps	Cross currency swaps	0		44		0		44		Cross currency swaps	0		44		0		44
Total assets	Total assets	$	0	$	748	$	0	$	748	Total assets	$	0	$	748	$	0	$	748
Liabilities:	Liabilities:									Liabilities:
Derivative instruments:	Derivative instruments:									Derivative instruments:
Interest rate swaps	Interest rate swaps	$	0	$	830	$	0	$	830	Interest rate swaps	$	0	$	830	$	0	$	830
Cross currency swaps	Cross currency swaps	0		142		0		142		Cross currency swaps	0		142		0		142
Total liabilities	Total liabilities	$	0	$	972	$	0	$	972	Total liabilities	$	0	$	972	$	0	$	972

The valuation techniques used in measuring assets and liabilities at fair value on a recurring basis are described below:

Derivative Instruments

The Company’s derivatives are transacted in over-the-counter markets and quoted market prices are not readily available. The Company uses third-party developed valuation models to value derivative instruments. These models estimate fair values using discounted cash flow modeling techniques, which utilize the contractual terms of the derivative instruments and market-based inputs, including interest rates and foreign exchange rates. Discount rates incorporate counterparty and HMC specific credit default spreads to reflect nonperformance risk.

The Company’s derivative instruments are classified as Level 2 since all significant inputs are observable and do not require management judgment. There were no transfers between fair value hierarchy levels during the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019. Refer to Note 5 for additional information on derivative instruments.

2625

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Nonrecurring Fair Value Measurements

The following tables summarize nonrecurring fair value measurements recognized for assets still held at the end of the reporting periods presented:


		Level 1		Level 2		Level 3		Total		Lower-of-cost or fair value adjustment			Level 1		Level 2		Level 3		Total		Lower-of-cost or fair value adjustment

		(U.S. dollars in millions)											(U.S. dollars in millions)
September 30, 2020
December 31, 2020												December 31, 2020
Vehicles held for disposition	Vehicles held for disposition	$	0	$	0	$	55	$	55	$	14	Vehicles held for disposition	$	0	$	0	$	81	$	81	$	19
September 30, 2019
December 31, 2019												December 31, 2019
Vehicles held for disposition	Vehicles held for disposition	$	0	$	0	$	121	$	121	$	27	Vehicles held for disposition	$	0	$	0	$	138	$	138	$	32

The following describes the methodologies and assumptions used in nonrecurring fair value measurements, which relate to the application of lower of cost or fair value accounting on long-lived assets.

Vehicles Held for Disposition

Vehicles held for disposition consist of returned and repossessed vehicles. They are valued at the lower of their carrying value or estimated fair value, less estimated disposition costs. The fair value is based on current average selling prices of like vehicles at wholesale used vehicle auctions.

Fair Value of Financial Instruments

The following tables summarize the carrying values and fair values of the Company’s financial instruments except for those measured at fair value on a recurring basis. Certain financial instruments and all nonfinancial assets and liabilities are excluded from fair value disclosure requirements including the Company’s investment in operating leases.

2726

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


		September 30, 2020											December 31, 2020
		Carrying		Fair value									Carrying		Fair value
		value		Level 1		Level 2		Level 3		Total			value		Level 1		Level 2		Level 3		Total

		(U.S. dollars in millions)											(U.S. dollars in millions)
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,950	$	2,950	$	0	$	0	$	2,950	Cash and cash equivalents	$	3,017	$	3,017	$	0	$	0	$	3,017
Dealer loans, net	Dealer loans, net	3,673		0		0		3,454		3,454		Dealer loans, net	4,270		0		0		4,110		4,110
Retail loans, net	Retail loans, net	35,899		0		0		37,258		37,258		Retail loans, net	36,560		0		0		37,538		37,538
Restricted cash	Restricted cash	515		515		0		0		515		Restricted cash	422		422		0		0		422
Liabilities:	Liabilities:											Liabilities:
Commercial paper	Commercial paper	$	4,353	$	0	$	4,354	$	0	$	4,354	Commercial paper	$	6,785	$	0	$	6,785	$	0	$	6,785
Related party debt	Related party debt	375		0		375		0		375		Related party debt	393		0		393		0		393
Bank loans	Bank loans	4,980		0		5,016		0		5,016		Bank loans	4,535		0		4,576		0		4,576
Medium-term note programs	Medium-term note programs	27,584		0		28,426		0		28,426		Medium-term note programs	28,675		0		29,557		0		29,557
Other debt	Other debt	3,635		0		3,756		0		3,756		Other debt	3,570		0		3,705		0		3,705
Secured debt	Secured debt	10,363		0		10,494		0		10,494		Secured debt	8,813		0		8,922		0		8,922

		March 31, 2020											March 31, 2020
		Carrying		Fair value									Carrying		Fair value
		value		Level 1		Level 2		Level 3		Total			value		Level 1		Level 2		Level 3		Total

		(U.S. dollars in millions)											(U.S. dollars in millions)
Assets:	Assets:											Assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,503	$	1,503	$	0	$	0	$	1,503	Cash and cash equivalents	$	1,503	$	1,503	$	0	$	0	$	1,503
Dealer loans, net	Dealer loans, net	5,600		0		0		5,136		5,136		Dealer loans, net	5,600		0		0		5,136		5,136
Retail loans, net	Retail loans, net	33,954		0		0		34,441		34,441		Retail loans, net	33,954		0		0		34,441		34,441
Restricted cash	Restricted cash	582		582		0		0		582		Restricted cash	582		582		0		0		582
Liabilities:	Liabilities:											Liabilities:
Commercial paper	Commercial paper	$	5,490	$	0	$	5,488	$	0	$	5,488	Commercial paper	$	5,490	$	0	$	5,488	$	0	$	5,488
Related party debt	Related party debt	533		0		533		0		533		Related party debt	533		0		533		0		533
Bank loans	Bank loans	4,938		0		4,780		0		4,780		Bank loans	4,938		0		4,780		0		4,780
Medium-term note programs	Medium-term note programs	26,157		0		25,740		0		25,740		Medium-term note programs	26,157		0		25,740		0		25,740
Other debt	Other debt	3,266		0		3,232		0		3,232		Other debt	3,266		0		3,232		0		3,232
Secured debt	Secured debt	9,748		0		9,794		0		9,794		Secured debt	9,748		0		9,794		0		9,794

Fair value information presented in the tables above is based on information available at ~~September 30,~~December 31, 2020 and March 31, 2020. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates, and therefore, the current estimates of fair value at dates subsequent to those dates may differ significantly from the amounts presented herein.

2827

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 14. Segment Information

The Company’s reportable segments are based on the 2 geographic regions where operating results are measured and evaluated by management: the United States and Canada.

Segment performance is evaluated using an internal measurement basis, which differs from the Company’s consolidated results prepared in accordance with GAAP. Segment performance is evaluated on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. Since the Company does not elect to apply hedge accounting, the impact to earnings resulting from these valuation adjustments as reported under GAAP is not representative of segment performance as evaluated by management. Realized gains and losses on derivative instruments, net of realized gains and losses on foreign currency denominated debt, are included in the measure of net revenues when evaluating segment performance.

No adjustments are made to segment performance to allocate any revenues or expenses. Financing products offered throughout the United States and Canada are substantially similar. Segment revenues from the various financing products are reported on the same basis as GAAP consolidated results.

Financial information for the three and ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019 is summarized in the following tables:

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


	United States		Canada		Valuation adjustments and reclassifications		Consolidated Total

	(U.S. dollars in millions)
Three months ended December 31, 2020
Revenues:
Retail	$	373	$	50	$	0	$	423
Dealer	22		3		0		25
Operating leases	1,612		339		0		1,951
Total revenues	2,007		392		0		2,399
Leased vehicle expenses	1,137		254		0		1,391
Interest expenses	177		30		0		207
Realized (gains)/losses on derivatives and foreign currency denominated debt	67		11		(78)		0
Net revenues	626		97		78		801
Other income, net	13		4		0		17
Total net revenues	639		101		78		818
Expenses:
General and administrative expenses	103		13		0		116
Provision for credit losses	(19)		0		—		(19)
Early termination loss on operating leases	(16)		(2)		0		(18)
(Gain)/Loss on derivative instruments	0		0		(259)		(259)
(Gain)/Loss on foreign currency revaluation of debt	0		0		279		279
Income before income taxes	$	571	$	90	$	58	$	719



Nine months ended December 31, 2020
Revenues:
Retail	$	1,113	$	143	$	0	$	1,256
Dealer	72		10		0		82
Operating leases	4,806		992		0		5,798
Total revenues	5,991		1,145		0		7,136
Leased vehicle expenses	3,435		753		0		4,188
Interest expenses	604		93		0		697
Realized (gains)/losses on derivatives and foreign currency denominated debt	192		31		(223)		0
Net revenues	1,760		268		223		2,251
Other income, net	35		11		0		46
Total net revenues	1,795		279		223		2,297
Expenses:
General and administrative expenses	305		39		0		344
Provision for credit losses	(17)		(3)		—		(20)
Early termination loss on operating leases	(133)		0		0		(133)
(Gain)/Loss on derivative instruments	0		0		(584)		(584)
(Gain)/Loss on foreign currency revaluation of debt	0		0		627		627
Income before income taxes	$	1,640	$	243	$	180	$	2,063

December 31, 2020
Finance receivables, net	$	36,388	$	4,442	$	0	$	40,830
Investment in operating leases, net	29,698		5,380		0		35,078
Total assets	71,343		10,304		0		81,647

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

United
States Canada Valuation
adjustments and
reclassifications Consolidated
Total
(U.S. dollars in millions)
Three months ended September 30, 2020
Revenues:
Retail $ 377 $ 49 $ 0 $ 426
Dealer 22 3 0 25
Operating leases 1,607 335 0 1,942
Total revenues 2,006 387 0 2,393
Leased vehicle expenses 1,108 253 0 1,361
Interest expenses 197 29 0 226
Realized (gains)/losses on derivatives and foreign
currency denominated debt 72 11 (83) 0
Net revenues 629 94 83 806
Other income, net 12 5 0 17
Total net revenues 641 99 83 823
Expenses:
General and administrative expenses 104 12 0 116
Provision for credit losses (2) (2) — (4)
Early termination loss on operating leases (56) (3) 0 (59)
(Gain)/Loss on derivative instruments 0 0 (232) (232)
(Gain)/Loss on foreign currency revaluation of debt 0 0 241 241
Income before income taxes $ 595 $ 92 $ 74 $ 761
Six months ended September 30, 2020
Revenues:
Retail $ 740 $ 93 $ 0 $ 833
Dealer 50 7 0 57
Operating leases 3,194 653 0 3,847
Total revenues 3,984 753 0 4,737
Leased vehicle expenses 2,298 499 0 2,797
Interest expenses 427 63 0 490
Realized (gains)/losses on derivatives and foreign
currency denominated debt 125 20 (145) 0
Net revenues 1,134 171 145 1,450
Other income, net 22 7 0 29
Total net revenues 1,156 178 145 1,479
Expenses:
General and administrative expenses 202 26 0 228
Provision for credit losses 2 (3) — (1)
Early termination loss on operating leases (117) 2 0 (115)
(Gain)/Loss on derivative instruments 0 0 (325) (325)
(Gain)/Loss on foreign currency revaluation of debt 0 0 348 348
Income before income taxes $ 1,069 $ 153 $ 122 $ 1,344
September 30, 2020
Finance receivables, net $ 35,275 $ 4,297 $ 0 $ 39,572
Investment in operating leases, net 29,267 5,171 0 34,438
Total assets 69,496 9,960 0 79,456

~~AMERICAN HONDA FINANCE CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~


		United States		Canada		Valuation adjustments and reclassifications		Consolidated Total			United States		Canada		Valuation adjustments and reclassifications		Consolidated Total

		(U.S. dollars in millions)									(U.S. dollars in millions)
Three months ended September 30, 2019
Three months ended December 31, 2019										Three months ended December 31, 2019
Revenues:	Revenues:									Revenues:
Retail	Retail	$	390	$	53	$	0	$	443	Retail	$	386	$	52	$	0	$	438
Dealer	Dealer	51		6		0		57		Dealer	46		6		0		52
Operating leases	Operating leases	1,595		340		0		1,935		Operating leases	1,609		343		0		1,952
Total revenues	Total revenues	2,036		399		0		2,435		Total revenues	2,041		401		0		2,442
Leased vehicle expenses	Leased vehicle expenses	1,152		257		0		1,409		Leased vehicle expenses	1,199		264		0		1,463
Interest expense	Interest expense	273		45		0		318		Interest expense	262		45		0		307
Realized (gains)/losses on derivatives and foreign currency denominated debt	Realized (gains)/losses on derivatives and foreign currency denominated debt	23		(1)		(22)		0		Realized (gains)/losses on derivatives and foreign currency denominated debt	33		0		(33)		0
Net revenues	Net revenues	588		98		22		708		Net revenues	547		92		33		672
Other income, net	Other income, net	20		3		0		23		Other income, net	21		3		0		24
Total net revenues	Total net revenues	608		101		22		731		Total net revenues	568		95		33		696
Expenses:	Expenses:									Expenses:
General and administrative expenses	General and administrative expenses	109		15		0		124		General and administrative expenses	110		14		0		124
Provision for credit losses	Provision for credit losses	56		2		—		58		Provision for credit losses	63		2		—		65
Early termination loss on operating leases	Early termination loss on operating leases	36		0		0		36		Early termination loss on operating leases	37		0		0		37
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	0		0		174		174		(Gain)/Loss on derivative instruments	0		0		(76)		(76)
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	0		0		(184)		(184)		(Gain)/Loss on foreign currency revaluation of debt	0		0		145		145
Income before income taxes	Income before income taxes	$	407	$	84	$	32	$	523	Income before income taxes	$	358	$	79	$	(36)	$	401

Six months ended September 30, 2019
Nine months ended December 31, 2019										Nine months ended December 31, 2019
Revenues:	Revenues:									Revenues:
Retail	Retail	$	772	$	104	$	0	$	876	Retail	$	1,158	$	156	$	0	$	1,314
Dealer	Dealer	110		12		0		122		Dealer	156		18		0		174
Operating leases	Operating leases	3,160		670		0		3,830		Operating leases	4,769		1,013		0		5,782
Total revenues	Total revenues	4,042		786		0		4,828		Total revenues	6,083		1,187		0		7,270
Leased vehicle expenses	Leased vehicle expenses	2,294		507		0		2,801		Leased vehicle expenses	3,493		771		0		4,264
Interest expense	Interest expense	550		90		0		640		Interest expense	812		135		0		947
Realized (gains)/losses on derivatives and foreign currency denominated debt	Realized (gains)/losses on derivatives and foreign currency denominated debt	38		(3)		(35)		0		Realized (gains)/losses on derivatives and foreign currency denominated debt	71		(3)		(68)		0
Net revenues	Net revenues	1,160		192		35		1,387		Net revenues	1,707		284		68		2,059
Other income, net	Other income, net	37		6		0		43		Other income, net	58		9		0		67
Total net revenues	Total net revenues	1,197		198		35		1,430		Total net revenues	1,765		293		68		2,126
Expenses:	Expenses:									Expenses:
General and administrative expenses	General and administrative expenses	215		30		0		245		General and administrative expenses	325		44		0		369
Provision for credit losses	Provision for credit losses	104		2		—		106		Provision for credit losses	167		4		—		171
Early termination loss on operating leases	Early termination loss on operating leases	59		1		0		60		Early termination loss on operating leases	96		1		0		97
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	0		0		205		205		(Gain)/Loss on derivative instruments	0		0		129		129
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	0		0		(146)		(146)		(Gain)/Loss on foreign currency revaluation of debt	0		0		(1)		(1)
Income before income taxes	Income before income taxes	$	819	$	165	$	(24)	$	960	Income before income taxes	$	1,177	$	244	$	(60)	$	1,361

September 30, 2019
December 31, 2019										December 31, 2019
Finance receivables, net	Finance receivables, net	$	35,737	$	4,486	$	0	$	40,223	Finance receivables, net	$	35,980	$	4,515	$	0	$	40,495
Investment in operating leases, net	Investment in operating leases, net	28,407		5,363		0		33,770		Investment in operating leases, net	28,914		5,522		0		34,436
Total assets	Total assets	66,960		10,020		0		76,980		Total assets	67,762		10,168		0		77,930

3130

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products and maintain customer and dealer satisfaction and loyalty. To deliver this support effectively, we seek to maintain competitive cost of funds, efficient operations, and effective risk and compliance management. The primary factors influencing our results of operations, cash flows, and financial condition include the volume of Honda and Acura sales and the portion of those sales that we finance, our cost of funds, competition from other financial institutions, consumer credit defaults, and used motor vehicle prices.

A substantial portion of our consumer financing business is acquired through incentive financing programs sponsored by AHM and HCI. The volume of these incentive financing programs and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. Our consumer financing acquisition volumes are substantially dependent on the extent to which incentive financing programs are offered. Increases in incentive financing programs generally increase our financing penetration rates, which typically results in increased financing acquisition volumes for us. The amount of subsidy payments we receive from AHM and HCI is dependent on the terms of the incentive financing programs and the interest rate environment. Subsidy payments are received upon acquisition and recognized in revenue throughout the life of the loan or lease; therefore, a significant change in the level of incentive financing programs in a fiscal period typically only has a limited impact on our results of operations for that period. The amount of subsidy income we recognize in a fiscal period is dependent on the cumulative level of subsidized contracts outstanding that were acquired through incentive financing programs.

We seek to maintain high quality consumer and dealer account portfolios, which we support with strong underwriting standards, risk-based pricing, and effective collection practices. Our cost of funds is facilitated by the diversity of our funding sources, and effective interest rate and foreign currency exchange risk management. We manage expenses to support our profitability, including adjusting staffing needs based upon our business volumes and centralizing certain functions. Additionally, we use risk and compliance management practices to optimize credit and residual value risk levels and maintain compliance with our pricing, underwriting and servicing policies at the United States, Canadian, state and provincial levels.

In our business operations, we incur costs related to funding, credit loss, residual value loss, and general and administrative expenses, among other expenses.

We analyze our operations in two business segments defined by geography: the United States and Canada. We measure the performance of our United States and Canada segments on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, see Note 14—Segment Information of Notes to Consolidated Financial Statements (Unaudited). The following tables and the related discussion are presented based on our geographically segmented consolidated financial statements.

References in this report to our “fiscal year 2021” and “fiscal year 2020” refer to our fiscal year ending March 31, 2021 and our fiscal year ended March 31, 2020, respectively.

3231

Recent Developments

Regional Office Consolidation

COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 a global pandemic. Extraordinary governmental measures were enacted in efforts to slow down and control the spread of COVID-19 including travel bans and border closings, shelter-in-place orders, closures of non-essential businesses and social distancing requirements. These restrictions, some of which have been and may continue to be reinstituted, along with the related changes in consumer behaviors, have resulted and may continue to result in an economic slowdown and a significant increase in unemployment in the United States and Canada.

We have modified certain business practices, including remote work arrangements, and we may take further action as may be required by government authorities, or that we determine are in the best interest of our employees, customers and dealers. As of the date of this report, our remote work arrangements have not caused material adverse disruptions to our business operations or financial reporting functions. In an effort to reduce expenses, we also implemented temporary furloughs and salary reductions, which were lifted during May 2020 and September 2020, respectively.

To assist our existing retail loan and lease customers who may have been impacted by COVID-19, payment deferrals ~~were~~have been granted to those customers who requested assistance beginning in mid-March 2020. Through the end of ~~September~~December 2020, a cumulative total of approximately ~~240,000~~259,000 retail loans and ~~190,000~~200,000 retail leases were granted payment deferrals, which represented approximately ~~10%~~11% and ~~12%~~13% of outstanding retail loans and retail leases as of ~~September 30,~~December 31, 2020, respectively. By the end of ~~September~~December 2020, approximately 94% of these customers were required to resume making their payments. The deferral periods ~~were~~are up to a maximum of 3 months in the United States and 4 months in Canada, generally from the date the customer was initially granted the deferral. Customers taking advantage of the deferrals ~~were~~are not considered delinquent during such deferral periods and therefore ~~were~~are not reflected in our delinquency measures. In the United States, approximately ~~20%~~18% of the customers that were required to resume making their payments after the expiration of their deferral period were delinquent as of ~~October~~January 31, ~~2020,~~2021, of which approximately 5% were 30 days or more past due and approximately 2%3% were repossessed or charged-off.

Many Honda and Acura dealerships temporarily suspended their sales operations beginning in mid-March. To help support the dealers during this period of disruption to their operations, beginning in March 2020, we have granted deferrals of interest payments on floorplans and principal payments on commercial loans generally for a period of 3 months. Interest ~~continued~~continues to accrue during the deferral period.

The suspension of sales operations at Honda and Acura dealerships and the decline in consumer demand had an impact on the sale of Honda and Acura vehicles. As a result, our consumer financing acquisition volumes also declined. Most dealerships resumed their sales operations beginning in May 2020 and with the support of incentive financing programs, our consumer financing acquisition volumes ~~have~~ recovered to pre-COVID-19 levels by June 2020.

Sales of returned vehicles were limited during April 2020 as most physical auctions temporarily suspended operations. Used vehicle prices were negatively impacted during the suspension of auctions but have since recovered to pre-COVID-19 levels by June 2020.

The COVID-19 pandemic initially led to disruptions and volatility in the global capital markets. To improve our liquidity position for potential disruptions in funding sources, we increased our cash balances in part through additional medium-term note issuances. Our overall ability to access funding sources has not been negatively impacted.

The near-and-long term impact of COVID-19 to our business remains highly uncertain and cannot be accurately predicted at this time. Although some of the initial governmental measures that were enacted to control the spread of COVID-19 have begun to be scaled back, recent surges in the spread of COVID-19 have resulted and may continue to result in the reimplementation of certain restrictions, which could adversely impact our business.

3332

Results of Operations

The following table presents our income before income taxes:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019

		(U.S. dollars in millions)									(U.S. dollars in millions)
Income before income taxes:	Income before income taxes:									Income before income taxes:
United States segment	United States segment	$	661	$	433	$	1,178	$	792	United States segment	$	621	$	321	$	1,799	$	1,113
Canada segment	Canada segment	100		90		166		168		Canada segment	98		80		264		248
Total income before income taxes	Total income before income taxes	$	761	$	523	$	1,344	$	960	Total income before income taxes	$	719	$	401	$	2,063	$	1,361

Comparison of the Three Months Ended ~~September 30,~~December 31, 2020 and 2019

Our consolidated income before income taxes was ~~$761~~$719 million during the ~~second~~third quarter of fiscal year 2021 compared to ~~$523~~$401 million during the same period in fiscal year 2020. This increase of ~~$238~~$318 million, or ~~46%~~79%, was due to the following differences:


		Three months ended September 30,									Three months ended December 31,
		2020		2019		Difference		% Change			2020		2019		Difference		% Change

		(U.S. dollars in millions)									(U.S. dollars in millions)
Net revenues:	Net revenues:									Net revenues:
Retail	Retail	$	426	$	443	$	(17)	(4)	%	Retail	$	423	$	438	$	(15)	(3)	%
Dealer	Dealer	25		57		(32)		(56)	%	Dealer	25		52		(27)		(52)	%
Operating lease, net of leased vehicle expenses	Operating lease, net of leased vehicle expenses	581		526		55		10	%	Operating lease, net of leased vehicle expenses	560		489		71		15	%
Interest expense	Interest expense	(226)		(318)		92		(29)	%	Interest expense	(207)		(307)		100		(33)	%
Other income, net	Other income, net	17		23		(6)		(26)	%	Other income, net	17		24		(7)		(29)	%
Total net revenues	Total net revenues	823		731		92		13	%	Total net revenues	818		696		122		18	%
Expenses:	Expenses:									Expenses:
General and administrative expenses	General and administrative expenses	116		124		(8)		(6)	%	General and administrative expenses	116		124		(8)		(6)	%
Provision for credit losses	Provision for credit losses	(4)		58		(62)		(107)	%	Provision for credit losses	(19)		65		(84)		n/m
Early termination loss on operating leases	Early termination loss on operating leases	(59)		36		(95)		n/m		Early termination loss on operating leases	(18)		37		(55)		n/m
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	(232)		174		(406)		n/m		(Gain)/Loss on derivative instruments	(259)		(76)		(183)		n/m
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	241		(184)		425		n/m		(Gain)/Loss on foreign currency revaluation of debt	279		145		134		92	%
Total expenses	Total expenses	62		208		(146)		(70)	%	Total expenses	99		295		(196)		(66)	%
Total income before income taxes	Total income before income taxes	$	761	$	523	$	238	46	%	Total income before income taxes	$	719	$	401	$	318	79	%

n/m = not meaningful

Comparison of the ~~Six~~Nine Months Ended ~~September 30,~~December 31, 2020 and 2019

Our consolidated income before income taxes was ~~$1,344~~$2,063 million during the first ~~six~~nine months of fiscal year 2021 compared to ~~$960~~$1,361 million during the same period in fiscal year 2020. This increase of ~~$384~~$702 million, or ~~40%~~52%, was due to the following differences:

3433


		Six months ended September 30,									Nine months ended December 31,
		2020		2019		Difference		% Change			2020		2019		Difference		% Change

		(U.S. dollars in millions)									(U.S. dollars in millions)
Net revenues:	Net revenues:									Net revenues:
Retail	Retail	$	833	$	876	$	(43)	(5)	%	Retail	$	1,256	$	1,314	$	(58)	(4)	%
Dealer	Dealer	57		122		(65)		(53)	%	Dealer	82		174		(92)		(53)	%
Operating lease, net of leased vehicle expenses	Operating lease, net of leased vehicle expenses	1,050		1,029		21		2	%	Operating lease, net of leased vehicle expenses	1,610		1,518		92		6	%
Interest expense	Interest expense	(490)		(640)		150		(23)	%	Interest expense	(697)		(947)		250		(26)	%
Other income, net	Other income, net	29		43		(14)		(33)	%	Other income, net	46		67		(21)		(31)	%
Total net revenues	Total net revenues	1,479		1,430		49		3	%	Total net revenues	2,297		2,126		171		8	%
Expenses:	Expenses:									Expenses:
General and administrative expenses	General and administrative expenses	228		245		(17)		(7)	%	General and administrative expenses	344		369		(25)		(7)	%
Provision for credit losses	Provision for credit losses	(1)		106		(107)		(101)	%	Provision for credit losses	(20)		171		(191)		n/m
Early termination loss on operating leases	Early termination loss on operating leases	(115)		60		(175)		n/m		Early termination loss on operating leases	(133)		97		(230)		n/m
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	(325)		205		(530)		n/m		(Gain)/Loss on derivative instruments	(584)		129		(713)		n/m
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	348		(146)		494		n/m		(Gain)/Loss on foreign currency revaluation of debt	627		(1)		628		n/m
Total expenses	Total expenses	135		470		(335)		(71)	%	Total expenses	234		765		(531)		(69)	%
Total income before income taxes	Total income before income taxes	$	1,344	$	960	$	384	40	%	Total income before income taxes	$	2,063	$	1,361	$	702	52	%

n/m = not meaningful

3534

Segment Results—Comparison of the Three Months Ended ~~September 30,~~December 31, 2020 and 2019

Results of operations for the United States segment and the Canada segment are summarized below:


		United States Segment				Canada Segment				Consolidated					United States Segment				Canada Segment				Consolidated
		Three months ended September 30,				Three months ended September 30,				Three months ended September 30,					Three months ended December 31,				Three months ended December 31,				Three months ended December 31,
		2020		2019		2020		2019		2020		2019			2020		2019		2020		2019		2020		2019

		(U.S. dollars in millions)													(U.S. dollars in millions)
Revenues:	Revenues:													Revenues:
Retail	Retail	$	377	$	390	$	49	$	53	$	426	$	443	Retail	$	373	$	386	$	50	$	52	$	423	$	438
Dealer	Dealer	22		51		3		6		25		57		Dealer	22		46		3		6		25		52
Operating leases	Operating leases	1,607		1,595		335		340		1,942		1,935		Operating leases	1,612		1,609		339		343		1,951		1,952
Total revenues	Total revenues	2,006		2,036		387		399		2,393		2,435		Total revenues	2,007		2,041		392		401		2,399		2,442
Leased vehicle expenses	Leased vehicle expenses	1,108		1,152		253		257		1,361		1,409		Leased vehicle expenses	1,137		1,199		254		264		1,391		1,463
Interest expense	Interest expense	197		273		29		45		226		318		Interest expense	177		262		30		45		207		307
Net revenues	Net revenues	701		611		105		97		806		708		Net revenues	693		580		108		92		801		672
Other income, net	Other income, net	12		20		5		3		17		23		Other income, net	13		21		4		3		17		24
Total net revenues	Total net revenues	713		631		110		100		823		731		Total net revenues	706		601		112		95		818		696
Expenses:	Expenses:													Expenses:
General and administrative expenses	General and administrative expenses	104		109		12		15		116		124		General and administrative expenses	103		110		13		14		116		124
Provision for credit losses	Provision for credit losses	(2)		56		(2)		2		(4)		58		Provision for credit losses	(19)		63		—		2		(19)		65
Early termination loss on operating leases	Early termination loss on operating leases	(56)		36		(3)		—		(59)		36		Early termination loss on operating leases	(16)		37		(2)		—		(18)		37
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	(235)		181		3		(7)		(232)		174		(Gain)/Loss on derivative instruments	(262)		(75)		3		(1)		(259)		(76)
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	241		(184)		—		—		241		(184)		(Gain)/Loss on foreign currency revaluation of debt	279		145		—		—		279		145
Income before income taxes	Income before income taxes	$	661	$	433	$	100	$	90	$	761	$	523	Income before income taxes	$	621	$	321	$	98	$	80	$	719	$	401

Revenues

Revenue from retail loans in the United States segment decreased by $13 million, or 3%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was primarily attributable to lower yields due to the declining interest rate environment. Revenue from retail loans in the Canada segment decreased by $4$2 million, or 8%4%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was ~~attributable~~primarily due to ~~lower average outstanding balances and~~ lower yields.

Operating lease revenue in the United States segment increased by ~~$12~~$3 million, ~~or 1%,~~ during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The increase was primarily attributable to higher average outstanding operating leases. Operating lease revenue in the Canada segment decreased by $5$4 million, or 1%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to lower average outstanding operating ~~leases and the effect of foreign currency translation adjustments.~~leases.

Revenue from dealer loans in the United States segment decreased by ~~$29~~$24 million, or ~~57%~~52%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower yields due to the declining interest rate environment and lower average outstanding balances. Revenue from dealer loans in the Canada segment decreased by $3 million, or 50%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower yields due to the declining interest rate environment and lower average outstanding balances.

Consolidated subsidy income from AHM and HCI sponsored incentive programs decreased by ~~$37~~$32 million, or 9%8%, to ~~$381~~$372 million during the ~~second~~third quarter of fiscal year 2021 compared to ~~$418~~$404 million during the same period in fiscal year 2020 primarily due to lower average outstanding incentive leases and incentive retail loans which resulted in the decrease in average subsidy payments received.

Leased vehicle expenses

Leased vehicle expenses in the United States segment decreased by ~~$44~~$62 million, or 4%5%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to higher gains on disposition of leased vehicles due to strong used vehicle prices during the ~~second~~third quarter of fiscal year 2021. Leased vehicle expenses in the Canada segment decreased by $4

$10 million, or 2%4%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was due to the decrease in depreciation on operating leases due to lower average outstanding operating ~~leases and the effect of foreign currency translation adjustments.~~leases.

Interest expense

Interest expense in the United States segment decreased by ~~$76~~$85 million, or ~~28%~~32%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to lower average interest rates. Interest expense in the Canada segment decreased by ~~$16~~$15 million, or ~~36%~~33%, during the ~~second~~third quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to lower average interest rates and lower average outstanding debt. See “—Liquidity and Capital Resources” below for more information.

Provision for credit losses

In the United States segment, we recognized a negative provision for credit losses of $2$19 million during the ~~second~~third quarter of fiscal year 2021 compared to a provision for credit losses of ~~$56~~$63 million during the same period in fiscal year 2020. The negative provision for credit losses was ~~primarily~~ attributable to the reduction in the allowance for credit losses and lower than expected net charge-offs of retail loans during the ~~second~~third quarter of fiscal year 2021. In the Canada segment, we recognized a negative provision for credit losses of $2less than $1 million during the ~~second~~third quarter of fiscal year 2021 compared to a provision for credit losses of $2 million during the same period in fiscal year 2020. The negative provision for credit losses is attributable to lower than expected net charge-offs during the ~~second~~third quarter of fiscal year 2021. See “—COVID-19 Pandemic” above and “—Financial Condition—Credit Risk” below for more information.

Early termination loss on operating leases

In the United States segment, we recognized a reversal of early termination losses on operating leases of ~~$56~~$16 million, during the ~~second~~third quarter of fiscal year 2021 compared to early termination losses of ~~$36~~$37 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of lower than expected realized losses during the ~~second~~third quarter of fiscal year 2021 and a reduction in the estimated impact that COVID-19 will have on lessee default rates. In the Canada segment, we recognized a reversal of early termination losses on operating leases of $3$2 million during the ~~second~~third quarter of fiscal year 2021 compared to early termination losses of less than $1 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of lower than expected realized losses during the ~~second~~third quarter of fiscal year 2021. See “—COVID-19 Pandemic” above and “—Financial Condition—Credit Risk” below for more information.

Gain/loss on derivative instruments

In the United States segment, we recognized a gain on derivative instruments of ~~$235~~$262 million during the ~~second~~third quarter of fiscal year 2021 compared to a ~~loss~~gain of ~~$181~~$75 million during the same period in fiscal year 2020. The gain in the ~~second~~third quarter of fiscal year 2021 was attributable to a gain on cross currency swaps of ~~$238~~$279 million, ~~and~~ a ~~gain~~loss on pay float interest rate swaps of $1$6 million ~~partially offset by~~and a loss on pay fixed interest rate swaps of $4$11 million. The gain on cross currency swaps during the ~~second~~third quarter of fiscal year 2021 was primarily attributable to the U.S. dollar weakening against the Euro and Sterling during the period. In the Canada segment, we recognized a loss on derivative instruments of $3 million during the ~~second~~third quarter of fiscal year 2021 compared to a gain of $7$1 million during the same period in fiscal year 2020. The loss in the ~~second~~third quarter of fiscal year 2021 was due to a decline in applicable swap rates during the period. See “—Derivatives” below for more information.

Gain/loss on foreign currency revaluation of debt

In the United States segment, we recognized a loss on the revaluation of foreign currency denominated debt of ~~$241~~$279 million during the ~~second~~third quarter of fiscal year 2021 compared to a ~~gain~~loss of ~~$184~~$145 million during the same period in fiscal year 2020. The loss in the ~~second~~third quarter of fiscal year 2021 was primarily due to the U.S. dollar weakening against the Euro and Sterling during the period.

Income tax expense

The consolidated effective tax rate was ~~27.3%~~22.3% for the ~~second~~third quarter of fiscal year 2021 and ~~25.8%~~26.4% for the same period in fiscal year 2020. The ~~increase~~decrease in the comparable period effective tax rate was primarily due to change in the U.S. state ~~taxes.~~jurisdictional mix and non-recurring unrecognized tax benefits. For additional information regarding income taxes, see Note 7—Income Taxes of Notes to Consolidated Financial Statements (Unaudited).

Segment Results—Comparison of the ~~Six~~Nine Months Ended ~~September 30,~~December 31, 2020 and 2019

Results of operations for the United States segment and the Canada segment are summarized below:


		United States Segment				Canada Segment				Consolidated					United States Segment				Canada Segment				Consolidated
		Six months ended September 30,				Six months ended September 30,				Six months ended September 30,					Nine months ended December 31,				Nine months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019		2020		2019			2020		2019		2020		2019		2020		2019

		(U.S. dollars in millions)													(U.S. dollars in millions)
Revenues:	Revenues:													Revenues:
Retail	Retail	$	740	$	772	$	93	$	104	$	833	$	876	Retail	$	1,113	$	1,158	$	143	$	156	$	1,256	$	1,314
Dealer	Dealer	50		110		7		12		57		122		Dealer	72		156		10		18		82		174
Operating leases	Operating leases	3,194		3,160		653		670		3,847		3,830		Operating leases	4,806		4,769		992		1,013		5,798		5,782
Total revenues	Total revenues	3,984		4,042		753		786		4,737		4,828		Total revenues	5,991		6,083		1,145		1,187		7,136		7,270
Leased vehicle expenses	Leased vehicle expenses	2,298		2,294		499		507		2,797		2,801		Leased vehicle expenses	3,435		3,493		753		771		4,188		4,264
Interest expense	Interest expense	427		550		63		90		490		640		Interest expense	604		812		93		135		697		947
Net revenues	Net revenues	1,259		1,198		191		189		1,450		1,387		Net revenues	1,952		1,778		299		281		2,251		2,059
Other income, net	Other income, net	22		37		7		6		29		43		Other income, net	35		58		11		9		46		67
Total net revenues	Total net revenues	1,281		1,235		198		195		1,479		1,430		Total net revenues	1,987		1,836		310		290		2,297		2,126
Expenses:	Expenses:													Expenses:
General and administrative expenses	General and administrative expenses	202		215		26		30		228		245		General and administrative expenses	305		325		39		44		344		369
Provision for credit losses	Provision for credit losses	2		104		(3)		2		(1)		106		Provision for credit losses	(17)		167		(3)		4		(20)		171
Early termination loss on operating leases	Early termination loss on operating leases	(117)		59		2		1		(115)		60		Early termination loss on operating leases	(133)		96		—		1		(133)		97
(Gain)/Loss on derivative instruments	(Gain)/Loss on derivative instruments	(332)		211		7		(6)		(325)		205		(Gain)/Loss on derivative instruments	(594)		136		10		(7)		(584)		129
(Gain)/Loss on foreign currency revaluation of debt	(Gain)/Loss on foreign currency revaluation of debt	348		(146)		—		—		348		(146)		(Gain)/Loss on foreign currency revaluation of debt	627		(1)		—		—		627		(1)
Income before income taxes	Income before income taxes	$	1,178	$	792	$	166	$	168	$	1,344	$	960	Income before income taxes	$	1,799	$	1,113	$	264	$	248	$	2,063	$	1,361

Revenues

Revenue from retail loans in the United States segment decreased by ~~$32~~$45 million, or 4%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was primarily attributable to lower yields due to the declining interest rate environment. Revenue from retail loans in the Canada segment decreased by ~~$11~~$13 million, or ~~11%~~8%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower average outstanding balances, ~~and~~ lower yields due to the declining interest rate ~~environment.~~environment and the effect of foreign currency translation adjustments.

Operating lease revenue in the United States segment increased by ~~$34~~$37 million, or 1%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The increase was primarily attributable to higher average outstanding operating leases. Operating lease revenue in the Canada segment decreased by ~~$17~~$21 million, or 3%2%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to lower average outstanding operating leases ~~lower net revenue on more recently acquired operating leases~~ and the effect of foreign currency translation adjustments.

Revenue from dealer loans in the United States segment decreased by ~~$60~~$84 million, or ~~55%~~54%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower yields due to the declining interest rate environment and lower average outstanding balances. Revenue from dealer loans in the Canada segment decreased by $5$8 million, or ~~42%~~44%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was ~~primarily due~~attributable to lower yields due to the declining interest rate ~~environment.~~

environment and lower average outstanding balances.

Consolidated subsidy income from AHM and HCI sponsored incentive programs decreased by ~~$105~~$137 million, or ~~12%~~11%, to ~~$740~~$1,112 million during the first ~~six~~nine months of fiscal year 2021 compared to ~~$845~~$1,249 million during the same period in fiscal year 2020 primarily due to lower average outstanding incentive leases and incentive retail loans which resulted in the decrease in average subsidy payments received.

Leased vehicle expenses

Leased vehicle expenses in the United States segment ~~increased~~decreased by $4$58 million, or 2%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The ~~increase~~decrease was ~~attributable to the increase in depreciation~~primarily due to ~~higher average outstanding operating leases partially offset by~~ higher gains on disposition of leased vehicles due to strong used vehicle prices during the first ~~six~~nine months of fiscal year 2021. Leased vehicle expenses in the Canada segment decreased by $8$18 million, or 2%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was primarily due to the decrease in depreciation on operating leases due to lower average outstanding operating leases and the effect of foreign currency translation adjustments.

Interest expense

Interest expense in the United States segment decreased by ~~$123~~$208 million, or ~~22%~~26%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to lower average interest rates. Interest expense in the Canada segment decreased by ~~$27~~$42 million, or ~~30%~~31%, during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to lower average interest rates and lower average outstanding debt. See “—Liquidity and Capital Resources” below for more information.

Provision for credit losses

~~The provision for credit losses in~~In the United States segment, ~~decreased by $102~~we recognized a negative provision of $17 million, ~~or 98%,~~ during the first ~~six~~nine months of fiscal year 2021 compared to a provision for credit losses of $167 million during the same period in fiscal year 2020. The ~~decrease in the~~negative provision for credit losses was ~~primarily~~ attributable to the reduction in the allowance for credit losses and lower than expected net charge-offs of retail loans during the first ~~six~~nine months of fiscal year 2021. In the Canada segment, we recognized a negative provision for credit losses of $3 million during the first ~~six~~nine months of fiscal year 2020 compared to a provision for credit losses of $2$4 million in the same period in fiscal year 2020. The negative provision for credit losses was primarily attributable to lower than expected net charge-offs during the first ~~six~~nine months of fiscal year 2021. See “—COVID-19 Pandemic” above and “—Financial Condition—Credit Risk” below for more information.

Early termination loss on operating leases

In the United States segment, we recognized a reversal of early termination losses on operating leases of ~~$117~~$133 million during the first ~~six~~nine months of fiscal year 2021 compared to early termination losses of ~~$59~~$96 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of lower than expected realized losses during the first ~~six~~nine months of fiscal year 2021 and a reduction in the estimated impact that COVID-19 will have on lessee default rates. Early termination losses on operating leases in the Canada segment ~~increased~~decreased by $1 million during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020. See “—COVID-19 Pandemic” above and “—Financial Condition—Credit Risk” below for more information.

Gain/loss on derivative instruments

In the United States segment, we recognized a gain on derivative instruments of ~~$332~~$594 million during the first ~~six~~nine months of fiscal year 2021 compared to a loss of ~~$211~~$136 million during the same period in fiscal year 2020. The gain in the first ~~six~~nine months of fiscal year 2021 was attributable to a gain on cross currency swaps of ~~$340~~$619 million and a gain on pay float interest rate swaps of ~~$65~~$59 million, partially offset by a loss on pay fixed interest rate swaps of ~~$73~~$84 million. The gain on cross currency swaps during the first ~~quarter~~nine months of fiscal year 2021 was primarily attributable to the U.S. dollar weakening against the Euro and Sterling during the period. The loss on pay fixed interest rate swaps and gain on pay float interest rate swaps during the first ~~six~~nine months of fiscal year 2021 were primarily due to the decline in applicable swap rates during the period. In the Canada segment, we recognized a loss on derivative instruments of $7$10 million during the first ~~six~~nine months of fiscal year 2021 compared to a gain of $6$7 million during the same period in fiscal year 2020. The loss in the first ~~six~~nine months of fiscal year 2021 was due to a decline in applicable swap rates during the period. See “—Derivatives” below for more information.

Gain/loss on foreign currency revaluation of debt

In the United States segment, we recognized a loss on the revaluation of foreign currency denominated debt of ~~$348~~$627 million during the first ~~six~~nine months of fiscal year 2021 compared to a gain of ~~$146~~$1 million during the same period in fiscal year 2020. The loss in the first ~~six~~nine months of fiscal year 2021 was primarily due to the U.S. dollar weakening against the Euro and Sterling during the period.

Income tax expense

The consolidated effective tax rate was ~~26.4%~~25.0% for the first ~~six~~nine months of fiscal year 2021 and ~~28.4%~~27.8% for the same period in fiscal year 2020. The reduction in the comparable period effective tax rate was primarily due to ~~changes~~change in the U.S. state jurisdictional mix and non-recurring unrecognized tax ~~benefits in the six months ended September 30, 2019~~, ~~offset in part by an increase in state taxes.~~benefits. For additional information regarding income taxes, see Note 7—Income Taxes of Notes to Consolidated Financial Statements (Unaudited).

4039

Financial Condition

Consumer Financing

Consumer Financing Acquisition Volumes

The following table summarizes the number of retail loans and leases we acquired and the number of such loans and leases acquired through incentive financing programs sponsored by AHM and HCI:


		Three months ended September 30,				Six months ended September 30,					Three months ended December 31,				Nine months ended December 31,
		2020		2019		2020		2019			2020		2019		2020		2019
		Acquired	Sponsored (2)	Acquired	Sponsored (2)	Acquired	Sponsored (2)	Acquired	Sponsored (2)		Acquired	Sponsored (2)	Acquired	Sponsored (2)	Acquired	Sponsored (2)	Acquired	Sponsored (2)

		(Units (1) in thousands)									(Units (1) in thousands)
United States Segment	United States Segment									United States Segment
Retail loans:	Retail loans:									Retail loans:
New auto	New auto	159	133	120	71	268	224	222	128	New auto	132	110	109	63	400	334	332	191
Used auto	Used auto	36	14	31	2	59	23	69	10	Used auto	24	7	28	3	83	30	97	13
Motorcycle and other	Motorcycle and other	21	1	17	—	53	1	40	1	Motorcycle and other	18	—	16	—	71	1	56	1
Total retail loans	Total retail loans	216	148	168	73	380	248	331	139	Total retail loans	174	117	153	66	554	365	485	205
Leases	Leases	136	119	157	128	232	202	298	239	Leases	122	103	133	105	354	305	430	345

Canada Segment	Canada Segment									Canada Segment
Retail loans:	Retail loans:									Retail loans:
New auto	New auto	20	18	18	16	29	26	35	32	New auto	14	12	14	13	43	38	49	45
Used auto	Used auto	4	—	1	—	6	—	2	—	Used auto	3	—	2	—	9	—	4	—
Motorcycle and other	Motorcycle and other	4	3	2	2	7	6	5	5	Motorcycle and other	1	1	1	1	8	8	6	6
Total retail loans	Total retail loans	28	21	21	18	42	32	42	37	Total retail loans	18	13	17	14	60	46	59	51
Leases	Leases	23	23	25	24	34	33	52	50	Leases	20	20	22	20	54	53	74	70

Consolidated	Consolidated									Consolidated
Retail loans:	Retail loans:									Retail loans:
New auto	New auto	179	151	138	87	297	250	257	160	New auto	146	122	123	76	443	372	381	236
Used auto	Used auto	40	14	32	2	65	23	71	10	Used auto	27	7	30	3	92	30	101	13
Motorcycle and other	Motorcycle and other	25	4	19	2	60	7	45	6	Motorcycle and other	19	1	17	1	79	9	62	7
Total retail loans	Total retail loans	244	169	189	91	422	280	373	176	Total retail loans	192	130	170	80	614	411	544	256
Leases	Leases	159	142	182	152	266	235	350	289	Leases	142	123	155	125	408	358	504	415

_______________________

(1)A unit represents one retail loan or lease contract, as noted, that was originated in the United States and acquired by AHFC or its subsidiaries, or that was originated in Canada and acquired by HCFI, in each case during the period shown.

(2)Represents the number of retail loans and leases acquired through incentive financing programs sponsored by AHM and/or HCI and only those contracts with subsidy payments. Excludes contracts where contractual rates met or exceeded AHFC’s yield requirements and subsidy payments were not required.

4140

Consumer Financing Penetration Rates

The following table summarizes the percentage of AHM and/or HCI sales of new automobiles and motorcycles that were financed with either retail loans or leases that we acquired:


		Three months ended September 30,		Six months ended September 30,			Three months ended December 31,		Nine months ended December 31,
		2020	2019	2020	2019		2020	2019	2020	2019
United States Segment	United States Segment					United States Segment
New auto	New auto	76%	64%	73%	62%	New auto	69%	60%	72%	62%
Motorcycle	Motorcycle	33%	32%	33%	33%	Motorcycle	32%	34%	33%	33%

Canada Segment	Canada Segment					Canada Segment
New auto	New auto	93%	81%	82%	81%	New auto	96%	91%	87%	84%
Motorcycle	Motorcycle	39%	31%	30%	30%	Motorcycle	29%	31%	30%	30%

Consolidated	Consolidated					Consolidated
New auto	New auto	78%	66%	74%	64%	New auto	72%	63%	73%	64%
Motorcycle	Motorcycle	34%	32%	33%	33%	Motorcycle	32%	33%	33%	33%

4241

Consumer Financing Asset Balances

The following table summarizes our outstanding retail loan and lease asset balances and units:


		September 30, 2020		March 31, 2020		September 30, 2020	March 31, 2020		December 31, 2020		March 31, 2020		December 31, 2020	March 31, 2020

		(U.S. dollars in millions)				(Units (1) in thousands)			(U.S. dollars in millions)				(Units (1) in thousands)
United States Segment	United States Segment							United States Segment
Retail loans:	Retail loans:							Retail loans:
New auto	New auto	$	25,660	$	24,353	1,544	1,510	New auto	$	26,166	$	24,353	1,563	1,510
Used auto	Used auto	5,118		4,999		367	356	Used auto	5,065		4,999		366	356
Motorcycle and other	Motorcycle and other	1,328		1,145		202	192	Motorcycle and other	1,346		1,145		203	192
Total retail loans	Total retail loans	$	32,106	$	30,497	2,113	2,058	Total retail loans	$	32,577	$	30,497	2,132	2,058
Investment in operating leases	Investment in operating leases	$	29,267	$	28,809	1,309	1,318	Investment in operating leases	$	29,698	$	28,809	1,313	1,318

Securitized retail loans (2)	Securitized retail loans (2)	$	9,740	$	8,977	759	703	Securitized retail loans (2)	$	8,214	$	8,977	668	703

Canada Segment	Canada Segment							Canada Segment
Retail loans:	Retail loans:							Retail loans:
New auto	New auto	$	3,445	$	3,195	253	258	New auto	$	3,590	$	3,195	250	258
Used auto	Used auto	232		178		25	24	Used auto	273		178		26	24
Motorcycle and other	Motorcycle and other	116		84		22	20	Motorcycle and other	120		84		22	20
Total retail loans	Total retail loans	$	3,793	$	3,457	300	302	Total retail loans	$	3,983	$	3,457	298	302
Investment in operating leases	Investment in operating leases	$	5,171	$	5,034	285	296	Investment in operating leases	$	5,380	$	5,034	280	296

Securitized retail loans (2)	Securitized retail loans (2)	$	557	$	668	52	58	Securitized retail loans (2)	$	510	$	668	48	58
Securitized investments in operating leases (2)	Securitized investments in operating leases (2)	$	472	$	493	24	24	Securitized investments in operating leases (2)	$	465	$	493	23	24

Consolidated	Consolidated							Consolidated
Retail loans:	Retail loans:							Retail loans:
New auto	New auto	$	29,105	$	27,548	1,797	1,768	New auto	$	29,756	$	27,548	1,813	1,768
Used auto	Used auto	5,350		5,177		392	380	Used auto	5,338		5,177		392	380
Motorcycle and other	Motorcycle and other	1,444		1,229		224	212	Motorcycle and other	1,466		1,229		225	212
Total retail loans	Total retail loans	$	35,899	$	33,954	2,413	2,360	Total retail loans	$	36,560	$	33,954	2,430	2,360
Investment in operating leases	Investment in operating leases	$	34,438	$	33,843	1,594	1,614	Investment in operating leases	$	35,078	$	33,843	1,593	1,614

Securitized retail loans (2)	Securitized retail loans (2)	$	10,297	$	9,645	811	761	Securitized retail loans (2)	$	8,724	$	9,645	716	761
Securitized investments in operating leases (2)	Securitized investments in operating leases (2)	$	472	$	493	24	24	Securitized investments in operating leases (2)	$	465	$	493	23	24

_______________________

(1)A unit represents one retail loan or lease contract, as noted, that was outstanding as of the date shown.

(2)Securitized retail loans and investments in operating leases represent the portion of total managed assets that have been sold in securitization transactions but continue to be recognized on our balance sheet.

In the United States segment, retail loan acquisition volumes increased by ~~15%~~14% during the first ~~six~~nine months of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to an increase in penetration rates with the support of incentive programs sponsored by AHM. Lease acquisition volumes decreased by 18% during the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to lower AHM sales volumes. In the Canada segment, retail loan acquisition volumes increased by 2% during the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to the increase in ~~sponsored new~~non-sponsored used auto loan acquisition volumes. Lease acquisition volumes decreased by ~~22%~~27% during the first six months of fiscal year 2021 compared to the same period in fiscal year 2020 due to the decrease in both sponsored and non-sponsored program volumes. In the Canada segment, retail loan acquisition volumes during the first six months of fiscal year 2021 were flat compared to the same period in fiscal year 2020. Lease acquisition volumes decreased by 35% during the first sixnine months of fiscal year 2021 compared to the same period in fiscal year 2020 due to the decrease in sponsored program volumes.

4342

Dealer Financing

Wholesale Flooring Financing Penetration Rates

The following table summarizes the number of dealerships with wholesale flooring financing agreements as a percentage of total Honda and Acura dealerships in the United States and/or Canada, as applicable:


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020
United States Segment	United States Segment					United States Segment
Automobile	Automobile	29	%	29	%	Automobile	28	%	29	%
Motorcycle	Motorcycle	97	%	97	%	Motorcycle	97	%	97	%
Other	Other	17	%	16	%	Other	18	%	16	%

Canada Segment	Canada Segment					Canada Segment
Automobile	Automobile	35	%	36	%	Automobile	34	%	36	%
Motorcycle	Motorcycle	94	%	96	%	Motorcycle	94	%	96	%
Other	Other	92	%	93	%	Other	92	%	93	%

Consolidated	Consolidated					Consolidated
Automobile	Automobile	30	%	30	%	Automobile	29	%	30	%
Motorcycle	Motorcycle	97	%	97	%	Motorcycle	97	%	97	%
Other	Other	19	%	19	%	Other	20	%	19	%

Wholesale Flooring Financing Percentage of Sales

The following table summarizes the percentage of AHM unit sales in the United States and/or HCI unit sales in Canada, as applicable, that we financed through wholesale flooring loans with dealerships:


		Three months ended September 30,		Six months ended September 30,			Three months ended December 31,		Nine months ended December 31,
		2020	2019	2020	2019		2020	2019	2020	2019
United States Segment	United States Segment					United States Segment
Automobile	Automobile	24%	26%	23%	27%	Automobile	26%	28%	24%	27%
Motorcycle	Motorcycle	98%	98%	98%	97%	Motorcycle	97%	98%	98%	98%
Other	Other	9%	9%	9%	9%	Other	4%	7%	7%	8%

Canada Segment	Canada Segment					Canada Segment
Automobile	Automobile	32%	33%	32%	33%	Automobile	30%	32%	32%	32%
Motorcycle	Motorcycle	85%	95%	87%	92%	Motorcycle	95%	97%	89%	93%
Other	Other	97%	96%	97%	96%	Other	96%	97%	97%	96%

Consolidated	Consolidated					Consolidated
Automobile	Automobile	25%	27%	24%	27%	Automobile	26%	29%	25%	28%
Motorcycle	Motorcycle	96%	97%	97%	97%	Motorcycle	97%	98%	97%	97%
Other	Other	11%	11%	13%	13%	Other	6%	10%	10%	12%

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Dealer Financing Asset Balances

The following table summarizes our outstanding dealer financing asset balances and units:


		September 30, 2020		March 31, 2020		September 30, 2020	March 31, 2020		December 31, 2020		March 31, 2020		December 31, 2020	March 31, 2020

		(U.S. dollars in millions)				(Units (1) in thousands)			(U.S. dollars in millions)				(Units (1) in thousands)
United States Segment	United States Segment							United States Segment
Wholesale flooring loans:	Wholesale flooring loans:							Wholesale flooring loans:
Automobile	Automobile	$	2,040	$	3,049	71	109	Automobile	$	2,676	$	3,049	93	109
Motorcycle	Motorcycle	260		760		32	96	Motorcycle	232		760		28	96
Other	Other	44		55		36	56	Other	31		55		26	56
Total wholesale flooring loans	Total wholesale flooring loans	$	2,344	$	3,864	139	261	Total wholesale flooring loans	$	2,939	$	3,864	147	261
Commercial loans	Commercial loans	$	826	$	1,020			Commercial loans	$	872	$	1,020

Canada Segment	Canada Segment							Canada Segment
Wholesale flooring loans:	Wholesale flooring loans:							Wholesale flooring loans:
Automobile	Automobile	$	391	$	547	15	21	Automobile	$	352	$	547	13	21
Motorcycle	Motorcycle	36		91		5	13	Motorcycle	27		91		4	13
Other	Other	19		24		16	27	Other	19		24		15	27
Total wholesale flooring loans	Total wholesale flooring loans	$	446	$	662	36	61	Total wholesale flooring loans	$	398	$	662	32	61
Commercial loans	Commercial loans	$	57	$	54			Commercial loans	$	61	$	54

Consolidated	Consolidated							Consolidated
Wholesale flooring loans:	Wholesale flooring loans:							Wholesale flooring loans:
Automobile	Automobile	$	2,431	$	3,596	86	130	Automobile	$	3,028	$	3,596	106	130
Motorcycle	Motorcycle	296		851		37	109	Motorcycle	259		851		32	109
Other	Other	63		79		52	83	Other	50		79		41	83
Total wholesale flooring loans	Total wholesale flooring loans	$	2,790	$	4,526	175	322	Total wholesale flooring loans	$	3,337	$	4,526	179	322
Commercial loans	Commercial loans	$	883	$	1,074			Commercial loans	$	933	$	1,074

_______________________

(1) A unit represents one automobile, power equipment, or marine engine, as applicable, financed through a wholesale flooring loan that was outstanding as of the date shown.

Credit Risk

Credit losses are an expected cost of extending credit. The majority of our credit risk is in consumer financing and to a lesser extent in dealer financing. Credit risk of our portfolio of consumer finance receivables can be affected by general economic conditions. Adverse changes, such as a rise in unemployment, can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. We manage our exposure to credit risk in retail loans by monitoring and adjusting our underwriting standards, which affect the level of credit risk that we assume, pricing contracts for expected losses and focusing collection efforts to minimize losses. We manage our exposure to credit risk for dealers through ongoing reviews of their financial condition.

We are also exposed to credit risk on our portfolio of operating lease assets. We expect a portion of our operating leases to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on our operating leases and our management of the risk are similar to that of our consumer finance receivables.

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Credit risk on dealer loans is affected primarily by the financial strength of the dealers within the portfolio, the value of collateral securing the financings, and economic and market factors that could affect the creditworthiness of dealers. We manage our exposure to credit risk in dealer financing by performing comprehensive reviews of dealers prior to establishing financing arrangements and monitoring the payment performance and creditworthiness of these dealers on an ongoing basis. In the event of default by a dealer, we seek all available legal remedies pursuant to related dealer agreements, guarantees, security interests on collateral, or liens on dealership assets. Additionally, we have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of their respective wholesale flooring agreements.

With the adoption of ASC 2016-13, the allowance for credit losses is management’s estimate of lifetime expected credit losses on the amortized cost basis of finance receivables. Additional information regarding credit losses is provided in the discussion of “—Critical Accounting Policies—Credit Losses” below.

The following table presents information with respect to our allowance for credit losses and credit loss experience of our finance receivables and losses related to lessee defaults on our operating leases:

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		As of or for the three months ended September 30,						As of or for the six months ended September 30,							As of or for the three months ended December 31,						As of or for the nine months ended December 31,
		2020			2019			2020			2019				2020			2019			2020			2019

		(U.S. dollars in millions)													(U.S. dollars in millions)
United States Segment	United States Segment													United States Segment
Finance receivables:	Finance receivables:													Finance receivables:
Allowance for credit losses at beginning of period (4)	Allowance for credit losses at beginning of period (4)	$	421		$	198		$	456		$	194		Allowance for credit losses at beginning of period (4)	$	402		$	190		$	456		$	194
Provision for credit losses	Provision for credit losses	(2)			56			2			104			Provision for credit losses	(19)			63			(17)			167
Charge-offs, net of recoveries	Charge-offs, net of recoveries	(17)			(64)			(56)			(108)			Charge-offs, net of recoveries	(31)			(61)			(87)			(169)
Allowance for credit losses at end of period	Allowance for credit losses at end of period	$	402		$	190		$	402		$	190		Allowance for credit losses at end of period	$	352		$	192		$	352		$	192
Allowance as a percentage of ending receivable balance (1)	Allowance as a percentage of ending receivable balance (1)							1.12		%	0.53		%	Allowance as a percentage of ending receivable balance (1)							0.95		%	0.53		%
Charge-offs as a percentage of average receivable balance (1), (3)	Charge-offs as a percentage of average receivable balance (1), (3)	0.19		%	0.70		%	0.32		%	0.59		%	Charge-offs as a percentage of average receivable balance (1), (3)	0.35		%	0.68		%	0.33		%	0.62		%
Delinquencies (60 or more days past due):	Delinquencies (60 or more days past due):													Delinquencies (60 or more days past due):
Delinquent amount (2)	Delinquent amount (2)							$	90		$	107		Delinquent amount (2)							$	116		$	127
As a percentage of ending receivable balance (1), (2)	As a percentage of ending receivable balance (1), (2)							0.25		%	0.29		%	As a percentage of ending receivable balance (1), (2)							0.31		%	0.35		%
Operating leases:	Operating leases:													Operating leases:
Early termination loss on operating leases	Early termination loss on operating leases	$	(56)		$	36		$	(117)		$	59		Early termination loss on operating leases	$	(16)		$	37		$	(133)		$	96
Canada Segment	Canada Segment													Canada Segment
Finance receivables:	Finance receivables:													Finance receivables:
Allowance for credit losses at beginning of period (4)	Allowance for credit losses at beginning of period (4)	13			6			15			7			Allowance for credit losses at beginning of period (4)	$	11		$	7		$	15		$	7
Provision for credit losses	Provision for credit losses	(2)			2			(3)			2			Provision for credit losses	—			2			(3)			4
Charge-offs, net of recoveries	Charge-offs, net of recoveries	(1)			(1)			(2)			(2)			Charge-offs, net of recoveries	—			(2)			(2)			(4)
Effect of translation adjustment	Effect of translation adjustment	1			—			1			—			Effect of translation adjustment	—			—			1			—
Allowance for credit losses at end of period	Allowance for credit losses at end of period	$	11		$	7		$	11		$	7		Allowance for credit losses at end of period	$	11		$	7		$	11		$	7
Allowance as a percentage of ending receivable balance (1)	Allowance as a percentage of ending receivable balance (1)							0.26		%	0.13		%	Allowance as a percentage of ending receivable balance (1)							0.25		%	0.14		%
Charge-offs as a percentage of average receivable balance (1), (3)	Charge-offs as a percentage of average receivable balance (1), (3)	—		%	0.11		%	0.07		%	0.09		%	Charge-offs as a percentage of average receivable balance (1), (3)	—		%	0.13		%	0.06		%	0.10		%
Delinquencies (60 or more days past due):	Delinquencies (60 or more days past due):													Delinquencies (60 or more days past due):
Delinquent amount (2)	Delinquent amount (2)							$	3		$	5		Delinquent amount (2)							$	4		$	5
As a percentage of ending receivable balance (1), (2)	As a percentage of ending receivable balance (1), (2)							0.07		%	0.12		%	As a percentage of ending receivable balance (1), (2)							0.08		%	0.10		%
Operating leases:	Operating leases:													Operating leases:
Early termination loss on operating leases	Early termination loss on operating leases	$	(3)		$	—		$	2		$	1		Early termination loss on operating leases	$	(2)		$	—		$	—		$	1
Consolidated	Consolidated													Consolidated
Finance receivables:	Finance receivables:													Finance receivables:
Allowance for credit losses at beginning of period (4)	Allowance for credit losses at beginning of period (4)	$	434		$	204		$	471		$	201		Allowance for credit losses at beginning of period (4)	$	413		$	197		$	471		$	201
Provision for credit losses	Provision for credit losses	(4)			58			(1)			106			Provision for credit losses	(19)			65			(20)			171
Charge-offs, net of recoveries	Charge-offs, net of recoveries	(18)			(65)			(58)			(110)			Charge-offs, net of recoveries	(31)			(63)			(89)			(173)
Effect of translation adjustment	Effect of translation adjustment	1			—			1			—			Effect of translation adjustment	—			—			1			—
Allowance for credit losses at end of period	Allowance for credit losses at end of period	$	413		$	197		$	413		$	197		Allowance for credit losses at end of period	$	363		$	199		$	363		$	199
Allowance as a percentage of ending receivable balance (1)	Allowance as a percentage of ending receivable balance (1)							1.03		%	0.48		%	Allowance as a percentage of ending receivable balance (1)							0.87		%	0.49		%
Charge-offs as a percentage of average receivable balance (1), (3)	Charge-offs as a percentage of average receivable balance (1), (3)	0.17		%	0.63		%	0.29		%	0.54		%	Charge-offs as a percentage of average receivable balance (1), (3)	0.31		%	0.61		%	0.3		%	0.56		%
Delinquencies (60 or more days past due):	Delinquencies (60 or more days past due):													Delinquencies (60 or more days past due):
Delinquent amount (2)	Delinquent amount (2)							$	93		$	112		Delinquent amount (2)							$	120		$	132
As a percentage of ending receivable balance (1), (2)	As a percentage of ending receivable balance (1), (2)							0.23		%	0.27		%	As a percentage of ending receivable balance (1), (2)							0.29		%	0.32		%
Operating leases:	Operating leases:													Operating leases:
Early termination loss on operating leases	Early termination loss on operating leases	$	(59)		$	36		$	(115)		$	60		Early termination loss on operating leases	$	(18)		$	37		$	(133)		$	97

_______________________

(1)Ending and average receivable balances exclude the allowance for credit losses, unearned subvention income related to our incentive financing programs and deferred origination costs. Average receivable balances are calculated based on the average of each month’s ending receivables balance for each respective period.

(2)For the purposes of determining whether a contract is delinquent, payment is generally considered to have been made, in the case of (i) dealer loans, upon receipt of 100% of the payment when due and (ii) consumer finance receivables, upon receipt of 90% of the sum of the current monthly payment plus any overdue monthly payments. Delinquent amounts presented are the aggregated principal balances of delinquent finance receivables. Payments that were granted deferrals are not considered delinquent during the deferral period. See above under "—COVID-19 Pandemic” for additional information.

(3)Percentages for the three and ~~six~~nine months ended ~~September 30,~~December 31, 2020 and ~~September 30,~~ 2019 have been annualized.

(4)Beginning allowance for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 includes the cumulative effect of adopting ASU 2016-13.

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In the United States segment, ~~the~~we recognized a negative provision for credit losses on our finance receivables ~~was $2~~of $17 million during the first ~~six~~nine months of fiscal year 2021 compared to ~~$104~~a provision for credit losses of $167 million during the same period in fiscal year 2020. The ~~decrease in the~~negative provision for credit losses was ~~primarily~~ attributable to the ~~decrease~~reduction in the ~~provision~~allowance for credit losses and lower than expected net charge-offs of retail loans. The forecasted economic factors that were applied in the modeling as of December 31, 2020 were more favorable as compared to those applied at the beginning of the period which contributed to the reduction in the allowance for retail ~~loans of $92 million.~~loans. Net charge-offs during the first ~~six~~nine months of fiscal year 2021 were favorable relative to the expected credit losses for the period, which had a positive effect on the provision for credit losses on retail loans. Delinquencies and net charge-offs of retail loans during the first ~~six~~nine months of fiscal year 2021 were lower compared to the same period in fiscal year 2020 due in part to payment deferrals that ~~were~~have been granted to requesting customers as a result of COVID-19. It is expected, however, that some customers will not be able to make the contractual payments after the deferral period and will ultimately default. We recognized a reversal of early termination losses on operating leases of ~~$117~~$133 million during the first ~~six~~nine months of fiscal year 2021 compared to losses of ~~$59~~$96 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of lower than expected realized losses during the first ~~six~~nine months of fiscal year 2021 and a reduction in the estimated impact that COVID-19 will have on lessee default rates. The effect of higher unemployment rates was reduced in the modeling of estimated early termination losses. See above under “—COVID-19 Pandemic” for additional information.

In the Canada segment, we recognized a negative provision for credit losses of $3 million on our finance receivables during the first ~~six~~nine months of fiscal year 2021 compared to a provision for credit losses of $2$4 million during the same period in fiscal year 2020. The negative provision for credit losses is primarily attributable to lower than expected net charge-offs of retail loans during the first ~~six~~nine months of fiscal year 2021. Early termination losses on operating lease assets was $2less than $1 million during the first ~~six~~nine months of fiscal year 2021 compared to $1 million during the same period in fiscal year 2020.

Lease Residual Value Risk

We assess our estimates for end of lease term market values of leased vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends, and market information on new and used vehicles. Our leasing volumes and those across the automotive industry have increased significantly in recent years. As a result, the supply of off-lease vehicles will continue to increase over the next several years, which could negatively impact used vehicle prices. Adjustments to estimated residual values are made on a straight-line basis over the remaining term of the lease and recognized as depreciation expense. Additional information regarding lease residual values is provided in the discussion of “—Critical Accounting Policies—Determination of Lease Residual Values” below.

We also review our investment in operating leases for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured by the amount the carrying values exceed their fair values. We did not recognize impairment losses due to declines in estimated residual values during the first ~~six~~nine months of fiscal year 2021 or the same period in fiscal year 2020.

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The following table summarizes our number of lease terminations and the method of disposition:


		Three months ended September 30,		Six months ended September 30,			Three months ended December 31,		Nine months ended December 31,
		2020	2019	2020	2019		2020	2019	2020	2019

		(Units (1) in thousands)					(Units (1) in thousands)
United States Segment	United States Segment					United States Segment
Termination units:	Termination units:					Termination units:
Sales at outstanding contractual balances (2)	Sales at outstanding contractual balances (2)	116	95	180	196	Sales at outstanding contractual balances (2)	100	79	280	275
Sales through auctions and dealer direct programs (3)	Sales through auctions and dealer direct programs (3)	21	40	59	94	Sales through auctions and dealer direct programs (3)	12	33	71	127
Total termination units	Total termination units	137	135	239	290	Total termination units	112	112	351	402

Canada Segment	Canada Segment					Canada Segment
Termination units:	Termination units:					Termination units:
Sales at outstanding contractual balances (2)	Sales at outstanding contractual balances (2)	25	22	40	45	Sales at outstanding contractual balances (2)	23	18	63	63
Sales through auctions and dealer direct programs (3)	Sales through auctions and dealer direct programs (3)	1	2	4	4	Sales through auctions and dealer direct programs (3)	2	1	6	5
Total termination units	Total termination units	26	24	44	49	Total termination units	25	19	69	68

Consolidated	Consolidated					Consolidated
Termination units:	Termination units:					Termination units:
Sales at outstanding contractual balances (2)	Sales at outstanding contractual balances (2)	141	117	220	241	Sales at outstanding contractual balances (2)	123	97	343	338
Sales through auctions and dealer direct programs (3)	Sales through auctions and dealer direct programs (3)	22	42	63	98	Sales through auctions and dealer direct programs (3)	14	34	77	132
Total termination units	Total termination units	163	159	283	339	Total termination units	137	131	420	470

_______________________

(1)A unit represents one terminated lease by their method of disposition during the period shown. Unit counts do not include leases that were terminated due to lessee defaults.

(2)Includes vehicles purchased by lessees or dealers for the contractual residual value at lease maturity or the outstanding contractual balance if purchased prior to lease maturity.

(3)Includes vehicles sold through online auctions and market based pricing options under our dealer direct programs or through physical auctions.

Liquidity and Capital Resources

Our liquidity strategy is to fund current and future obligations through our cash flows from operations and our diversified funding programs in a cost and risk effective manner. Our cash flows are generally impacted by cash requirements related to the volume of finance receivable and operating lease acquisitions and various operating and funding costs incurred, which are largely funded through payments received on our assets and our funding sources outlined below. As noted, the levels of incentive financing sponsored by AHM and HCI can impact our financial results and liquidity from period to period. Increases or decreases in incentive financing programs typically increase or decrease our financing penetration rates, respectively, which result in increased or decreased acquisition volumes and increased or decreased liquidity needs, respectively. At acquisition, we receive the subsidy payments, which reduce the cost of consumer loan and lease contracts acquired, and we recognize such payments as revenue over the term of the loan or lease.

In an effort to minimize liquidity risk and interest rate risk and the resulting negative effects on our margins, results of operations and cash flows, our funding strategy incorporates investor diversification and the utilization of multiple funding sources including commercial paper, medium-term notes, bank loans and asset-backed securities. We incorporate a funding strategy that takes into consideration factors such as the interest rate environment, domestic and foreign capital market conditions, maturity profiles, and economic conditions. See above under “—COVID-19 Pandemic” for additional information. We believe that our funding sources, combined with cash provided by operating and investing activities, will provide sufficient liquidity for us to meet our debt service and working capital requirements over the next twelve months.

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The summary of outstanding debt presented in the tables and discussion below in this section “—Liquidity and Capital Resources” as of ~~September 30,~~December 31, 2020 and March 31, 2020 includes foreign currency denominated debt, which was translated into U.S. dollars using the relevant exchange rates as of ~~September 30,~~December 31, 2020 and March 31, 2020, as applicable. Additionally, the amounts in this section that are presented in “C$” (Canadian dollar), “€” (Euro), “£” (Sterling) and “¥” (Yen) were converted into U.S. dollars solely for the convenience based on the exchange rate on ~~September 30,~~December 31, 2020 of ~~1.3319, 1.1718, 1.2902~~1.2725, 1.2211, 1.3668 and ~~105.47,~~103.28, respectively, per U.S. dollar. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or that they could be converted into U.S. dollars at the rates indicated.

Summary of Outstanding Debt

The table below presents a summary of our outstanding debt by various funding sources:


						Weighted average contractual interest rate									Weighted average contractual interest rate
		September 30, 2020		March 31, 2020		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020		December 31, 2020		March 31, 2020

		(U.S. dollars in millions)									(U.S. dollars in millions)
United States Segment	United States Segment									United States Segment
Unsecured debt:	Unsecured debt:									Unsecured debt:
Commercial paper	Commercial paper	$	3,498	$	4,486	0.44	%	1.83	%	Commercial paper	$	5,737	$	4,486	0.34	%	1.83	%
Bank loans	Bank loans	3,798		3,797		1.04	%	2.21	%	Bank loans	3,298		3,797		1.05	%	2.21	%
Private MTN program	Private MTN program	500		999		3.80	%	3.84	%	Private MTN program	500		999		3.80	%	3.84	%
Public MTN program	Public MTN program	27,056		25,130		1.66	%	2.07	%	Public MTN program	28,146		25,130		1.61	%	2.07	%
Euro MTN programme	Euro MTN programme	28		28		2.23	%	2.23	%	Euro MTN programme	29		28		2.23	%	2.23	%
Total unsecured debt	Total unsecured debt	34,880		34,440						Total unsecured debt	37,710		34,440
Secured debt	Secured debt	9,454		8,710		1.68	%	2.26	%	Secured debt	7,964		8,710		1.65	%	2.26	%
Total debt	Total debt	$	44,334	$	43,150					Total debt	$	45,674	$	43,150

Canada Segment	Canada Segment									Canada Segment
Unsecured debt:	Unsecured debt:									Unsecured debt:
Commercial paper	Commercial paper	$	855	$	1,004	0.57	%	1.73	%	Commercial paper	$	1,048	$	1,004	0.53	%	1.73	%
Related party debt	Related party debt	375		533		0.54	%	1.76	%	Related party debt	393		533		0.54	%	1.76	%
Bank loans	Bank loans	1,182		1,141		1.22	%	2.01	%	Bank loans	1,237		1,141		1.19	%	2.01	%
Other debt	Other debt	3,635		3,266		2.18	%	2.47	%	Other debt	3,570		3,266		2.27	%	2.47	%
Total unsecured debt	Total unsecured debt	6,047		5,944						Total unsecured debt	6,248		5,944
Secured debt	Secured debt	909		1,038		1.01	%	2.13	%	Secured debt	849		1,038		0.99	%	2.13	%
Total debt	Total debt	$	6,956	$	6,982					Total debt	$	7,097	$	6,982

Consolidated	Consolidated									Consolidated
Unsecured debt:	Unsecured debt:									Unsecured debt:
Commercial paper	Commercial paper	$	4,353	$	5,490	0.47	%	1.81	%	Commercial paper	$	6,785	$	5,490	0.37	%	1.81	%
Related party debt	Related party debt	375		533		0.54	%	1.76	%	Related party debt	393		533		0.54	%	1.76	%
Bank loans	Bank loans	4,980		4,938		1.08	%	2.16	%	Bank loans	4,535		4,938		1.09	%	2.16	%
Private MTN program	Private MTN program	500		999		3.80	%	3.84	%	Private MTN program	500		999		3.80	%	3.84	%
Public MTN program	Public MTN program	27,056		25,130		1.66	%	2.07	%	Public MTN program	28,146		25,130		1.61	%	2.07	%
Euro MTN programme	Euro MTN programme	28		28		2.23	%	2.23	%	Euro MTN programme	29		28		2.23	%	2.23	%
Other debt	Other debt	3,635		3,266		2.18	%	2.47	%	Other debt	3,570		3,266		2.27	%	2.47	%
Total unsecured debt	Total unsecured debt	40,927		40,384						Total unsecured debt	43,958		40,384
Secured debt	Secured debt	10,363		9,748		1.62	%	2.25	%	Secured debt	8,813		9,748		1.59	%	2.25	%
Total debt	Total debt	$	51,290	$	50,132					Total debt	$	52,771	$	50,132

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Commercial Paper

As of ~~September 30,~~December 31, 2020, we had commercial paper programs in the United States of $7.0 billion and in Canada of C$2.5 billion ($~~1.9~~2.0 billion). Interest rates on the commercial paper are fixed at the time of issuance. During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, consolidated commercial paper month-end outstanding principal balances ranged from $3.7 billion to ~~$5.9~~$6.8 billion.

Related Party Debt

HCFI issues fixed rate notes to HCI to help fund HCFI’s general corporate operations. Interest rates are based on prevailing rates of debt with comparable terms. Generally, the term of these notes is less than 120 days.

Bank Loans

During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, AHFC did not enter into any term loan agreements. HCFI entered into two floating rate term loan agreements for a total of C$600 million ($~~450~~472 million). As of ~~September 30,~~December 31, 2020, we had bank loans denominated in U.S. dollars and Canadian dollars with floating and fixed interest rates, in principal amounts ranging from ~~$38~~$39 million to $600 million. As of ~~September 30,~~December 31, 2020, the remaining maturities of all bank loans outstanding ranged from 7988 days to approximately ~~4.5~~4.2 years. The weighted average remaining maturity on all bank loans was ~~1.5~~1.4 years as of ~~September 30,~~December 31, 2020.

Our bank loans contain customary restrictive covenants, including limitations on liens, mergers, consolidations and asset sales, and a financial covenant that requires us to maintain positive consolidated tangible net worth. In addition to other customary events of default, the bank loans include cross-default provisions and provisions for default if HMC does not maintain ownership, whether directly or indirectly, of at least 80% of the outstanding capital stock of AHFC or HCFI, as applicable. All of these covenants and events of default are subject to important limitations and exceptions under the agreements governing the bank loans. As of ~~September 30,~~December 31, 2020, management believes that AHFC and HCFI were in compliance with all covenants contained in our bank loans.

Medium-Term Note (MTN) Programs

Private MTN Program

AHFC no longer issues MTNs under its Rule 144A Private MTN Program. As of ~~September 30,~~December 31, 2020, AHFC has one note outstanding under the Private MTN program with a remaining maturity that does not exceed 1.0 year. The note was issued pursuant to the terms of an issuing and paying agency agreement, which requires AHFC to comply with certain covenants, including negative pledge provisions, and includes customary events of defaults. As of ~~September 30,~~December 31, 2020, management believes that AHFC was in compliance with all covenants contained in the Private MTN.

Public MTN Program

AHFC is a well-known seasoned issuer under SEC rules and issues Public MTNs pursuant to a registration statement on Form S-3 filed with the SEC. In August 2019, AHFC renewed its Public MTN program by filing a registration statement with the SEC under which it may issue from time to time up to $30.0 billion aggregate principal amount of Public MTNs, which includes the issuance of foreign currency denominated notes into international markets. The aggregate principal amount of MTNs offered under this program may be increased from time to time.

The Public MTNs may have original maturities of 9 months or more from the date of issue, may be interest bearing with either fixed or floating interest rates, or may be discounted notes. During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, AHFC issued €1.5 billion aggregate principal amount of Euro denominated fixed rate MTNs, with an original maturity range from 2.0 years to 4.5 years, ~~$3.5~~£500 million aggregate principal amount of Sterling denominated fixed rate MTNs, with an original maturity of 6 years, $4.1 billion fixed rate notes with an original maturity range from ~~3.0~~2.0 to 5.0 years, and ~~$300~~$750 million floating rate notes, ~~which~~with an original maturity ofrange from 15 months to 3.0 years. The weighted average remaining maturities of all Public MTNs was ~~2.4~~2.3 years as of ~~September 30,~~December 31, 2020.

The Public MTNs are issued pursuant to an indenture, which requires AHFC to comply with certain covenants, including negative pledge provisions and restrictions on AHFC’s ability to merge, consolidate or transfer substantially all of its assets or the assets of its subsidiaries, and includes customary events of default. As of ~~September 30,~~December 31, 2020, management believes that AHFC was in compliance with all covenants under the indenture.

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Euro MTN Programme

The Euro MTN Programme was retired in August 2014. AHFC has one note outstanding under this program. The note has a maturity date of February 21, 2023, a fixed interest rate and is not listed on the Luxembourg Stock Exchange. The note was issued pursuant to the terms of an agency agreement which requires AHFC to comply with certain covenants, including negative pledge provisions, and includes customary events of default. As of ~~September 30,~~December 31, 2020, management believes that AHFC was in compliance with all covenants contained in the Euro MTNs.

The table below presents a summary of outstanding debt issued under our MTN Programs by currency:


		September 30, 2020		March 31, 2020			December 31, 2020		March 31, 2020

		(U.S. dollars in millions)					(U.S. dollars in millions)
U.S. dollar	U.S. dollar	$	21,756	$	22,309	U.S. dollar	$	21,910	$	22,309
Euro	Euro	5,026		3,076		Euro	5,240		3,076
Sterling	Sterling	773		744		Sterling	1,496		744
Japanese yen	Japanese yen	29		28		Japanese yen	29		28
Total	Total	$	27,584	$	26,157	Total	$	28,675	$	26,157

Other Debt

HCFI issues privately placed Canadian dollar denominated notes, with either fixed or floating interest rates. During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, HCFI entered into ~~two private placement transactions for~~ C$~~700~~500 million ($~~526~~393 million). fixed rate notes with an original maturity of 5.5 years and C$200 million ($157 million) floating rate notes with an original maturity of 2.0 years. As of ~~September 30,~~December 31, 2020, the remaining maturities of all of HCFI’s Canadian notes outstanding ranged from 7949 days to approximately ~~5.5~~5.2 years. The weighted average remaining maturities of these notes was ~~2.6~~2.5 years as of ~~September 30,~~December 31, 2020.

The notes are issued pursuant to the terms of an indenture, which requires HCFI to comply with certain covenants, including negative pledge provisions, and includes customary events of default. As of ~~September 30,~~December 31, 2020, management believes that HCFI was in compliance with all covenants contained in the privately placed notes.

Secured Debt

Asset-Backed Securities

We enter into securitization transactions for funding purposes. Our securitization transactions involve transferring pools of retail loans and operating leases to bankruptcy-remote special purpose entities (SPEs). The SPEs are established to accommodate securitization structures, which have the limited purpose of acquiring assets, issuing asset-backed securities, and making payments on the securities. Assets transferred to SPEs are considered legally isolated from us and the claims of our creditors. We continue to service the retail loans and operating leases transferred to the SPEs. Investors in the notes issued by a SPE only have recourse to the assets of such SPE and do not have recourse to the assets of AHFC, HCFI, or our other subsidiaries or to other SPEs. The assets of SPEs are the only source of funds for repayment on the ~~notes~~notes.

Our securitizations are structured to provide credit enhancements to investors in the notes issued by the SPEs. Credit enhancements can include the following:

•Subordinated certificates— securities issued by SPEs that are retained by us and are subordinated in priority of payment to the notes.

•Overcollateralization— securitized asset balances that exceed the balance of securities issued by SPEs.

•Excess interest— excess interest collections to be used to cover losses on defaulted loans.

•Reserve funds— restricted cash accounts held by the SPEs to cover shortfalls in payments of interest and principal required to be paid on the notes.

•Yield supplement accounts— restricted cash accounts held by SPEs to supplement interest payments on notes.

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The risk retention regulations in Regulation RR of the Securities Exchange Act of 1934, as amended (Exchange Act), require the sponsor to retain an economic interest in the credit risk of the securitized assets, either directly or through one or more majority-owned affiliates. Standard risk retention options allow the sponsor to retain either an eligible vertical interest, an eligible horizontal residual interest, or a combination of both. AHFC has satisfied this obligation by retaining an eligible vertical interest of an amount equal to at least 5% of the principal amount of each class of note and certificate issued for the securitization transaction that was subject to this rule but may choose to use other structures in the future.

We are required to consolidate the SPEs in our financial statements, which results in the securitizations being accounted for as on-balance sheet secured financings. The securitized assets remain on our consolidated balance sheet along with the notes issued by the SPEs.

During the ~~six~~nine months ended ~~September 30,~~December 31, 2020, we issued notes through asset-backed securitizations totaling $3.3 billion, which were secured by assets with an initial balance of $3.5 billion.

Credit Agreements

Syndicated Bank Credit Facilities

AHFC maintains a $3.5 billion 364-day credit agreement, which expires on February 26, 2021, a $2.1 billion credit agreement, which expires on February 28, 2023, and a $1.4 billion credit agreement, which expires on February 28, 2025. As of ~~September 30,~~December 31, 2020, no amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.

HCFI maintains a C$2.0 billion ($~~1.5~~1.6 billion) credit agreement which provides that HCFI may borrow up to C$1.0 billion ($~~751~~786 million) on a one-year revolving basis and up to C$1.0 billion ($~~751~~786 million) on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 2021 and the five-year tranche of the credit agreement expires on March 25, 2025. As of ~~September 30,~~December 31, 2020, no amounts were drawn upon under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the expiration date of each respective tranche.

The credit agreements contain customary conditions to borrowing and customary restrictive covenants, including limitations on liens and limitations on mergers, consolidations and asset sales, and limitations on affiliate transactions. The credit agreements also require AHFC and HCFI to maintain a positive consolidated tangible net worth as defined in their respective credit agreements. The credit agreements, in addition to other customary events of default, include cross-default provisions and provisions for default if HMC does not maintain ownership, whether directly or indirectly, of at least 80% of the outstanding capital stock of AHFC or HCFI, as applicable. In addition, the AHFC and HCFI credit agreements contain provisions for default if HMC’s obligations under the HMC-AHFC Keep Well Agreement or the HMC-HCFI Keep Well Agreement, as applicable, become invalid, voidable, or unenforceable. All of these conditions, covenants and events of default are subject to important limitations and exceptions under the agreements governing the credit agreements. As of ~~September 30,~~December 31, 2020, management believes that AHFC and HCFI were in compliance with all covenants contained in the respective credit agreements.

Other Credit Agreements

AHFC maintains other committed lines of credit that allow the Company access to an additional $1.0 billion in unsecured funding with two banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales and a requirement for AHFC to maintain a positive consolidated tangible net worth. As of ~~September 30,~~December 31, 2020, no amounts were drawn upon under these agreements. These agreements expire in September 2021. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates.

Keep Well Agreements

HMC has entered into separate Keep Well Agreements with AHFC and HCFI. Pursuant to the Keep Well Agreements, HMC has agreed to, among other things:

•own and hold, at all times, directly or indirectly, at least 80% of each of AHFC’s and HCFI’s issued and outstanding shares of voting stock and not pledge, directly or indirectly, encumber, or otherwise dispose of any such shares or permit any of HMC’s subsidiaries to do so, except to HMC or wholly-owned subsidiaries of HMC;

5352

•cause each of AHFC and HCFI to, on the last day of each of AHFC’s and HCFI’s respective fiscal years, have a positive consolidated tangible net worth (with “tangible net worth” meaning (a) shareholders’ equity less (b) any intangible assets, as determined in accordance with GAAP with respect to AHFC and generally accepted accounting principles in Canada with respect to HCFI); and

•ensure that, at all times, each of AHFC and HCFI has sufficient liquidity and funds to meet their payment obligations under any Debt (with “Debt” defined as AHFC’s or HCFI’s debt, as applicable, for borrowed money that HMC has confirmed in writing is covered by the respective Keep Well Agreement) in accordance with the terms of such Debt, or where necessary, HMC will make available to AHFC or HCFI, as applicable, or HMC will procure for AHFC or HCFI, as applicable, sufficient funds to enable AHFC or HCFI, as applicable, to pay its Debt in accordance with its terms. AHFC or HCFI Debt does not include the notes issued by SPEs in connection with AHFC’s or HCFI’s secured financing transactions, any related party debt or any indebtedness outstanding as of ~~September 30,~~December 31, 2020 under AHFC’s and HCFI’s bank loan agreements.

As consideration for HMC’s obligations under the Keep Well Agreements, we have agreed to pay HMC a quarterly fee based on the amount of outstanding Debt pursuant to Support Compensation Agreements, dated April 1, 2019. We incurred expenses of $18 million and $17 million during the three months ended ~~September 30,~~December 31, 2020 and 2019, respectively, and ~~$35~~$53 million and ~~$34~~$51 million for the ~~six~~nine months ended ~~September 30,~~December 31, 2020 and 2019, respectively, pursuant to these Support Compensation Agreements.

Indebtedness of Consolidated Subsidiaries

As of ~~September 30,~~December 31, 2020, AHFC and its consolidated subsidiaries had ~~$61.0~~$62.5 billion of outstanding indebtedness and other liabilities, including current liabilities, of which ~~$18.0~~$16.6 billion consisted of indebtedness and liabilities of our consolidated subsidiaries. None of AHFC’s consolidated subsidiaries had any outstanding preferred equity.

Derivatives

We utilize derivative instruments to mitigate exposures to fluctuations in interest rates and foreign currency exchange rates. The types of derivative instruments include interest rate swaps, basis swaps, and cross currency swaps. Interest rate and basis swap agreements are used to mitigate the effects of interest rate fluctuations of our floating rate debt relative to our fixed rate finance receivables and operating lease assets. Cross currency swap agreements are used to manage currency and interest rate risk exposure on foreign currency denominated debt. The derivative instruments contain an element of credit risk in the event the counterparties are unable to meet the terms of the agreements.

All derivative financial instruments are recorded on our consolidated balance sheet as assets or liabilities, and carried at fair value. Changes in the fair value of derivatives are recognized in our consolidated statements of income in the period of the change. Since we do not elect to apply hedge accounting, the impact to earnings resulting from these valuation adjustments as reported under GAAP is not representative of our results of operations as evaluated by management. Realized gains and losses on derivative instruments, net of realized gains and losses on foreign currency denominated debt, are included in the measure of net revenues when we evaluate segment performance. Refer to Note 14—Segment Information of Notes to Consolidated Financial Statements (Unaudited) for additional information about segment information and Note 5—Derivative Instruments of Notes to Consolidated Financial Statements (Unaudited) for additional information on derivative instruments.

Off-Balance Sheet Arrangements

We are not a party to off-balance sheet arrangements.

5453

Contractual Obligations

The following table summarizes our contractual obligations, excluding lending commitments to dealers and derivative obligations, for the periods indicated:


		Payments due for the twelve month periods ending September 30,															Payments due for the twelve month periods ending December 31,
		Total		2021		2022		2023		2024		2025		Thereafter			Total		2021		2022		2023		2024		2025		Thereafter

		(U.S. dollars in millions)															(U.S. dollars in millions)
Unsecured debt obligations (1)	Unsecured debt obligations (1)	$	40,997	$	13,345	$	9,184	$	8,759	$	4,386	$	3,447	$	1,876	Unsecured debt obligations (1)	$	44,027	$	16,828	$	10,016	$	7,361	$	5,153	$	2,093	$	2,576
Secured debt obligations (1)	Secured debt obligations (1)	10,379		5,460		3,122		1,621		176		—		—		Secured debt obligations (1)	8,825		4,809		2,804		1,212		—		—		—
Interest payments on debt (2)	Interest payments on debt (2)	1,861		684		487		336		179		100		75		Interest payments on debt (2)	1,721		651		451		301		162		75		81
Operating lease obligations	Operating lease obligations	56		10		9		8		8		6		15		Operating lease obligations	43		9		8		7		6		5		8
Total	Total	$	53,293	$	19,499	$	12,802	$	10,724	$	4,749	$	3,553	$	1,966	Total	$	54,616	$	22,297	$	13,279	$	8,881	$	5,321	$	2,173	$	2,665

_______________________

(1)Debt obligations reflect the remaining principal obligations of our outstanding debt and do not reflect unamortized debt discounts and fees. Repayment schedule of secured debt reflects payment performance assumptions on underlying receivables. Foreign currency denominated debt principal is based on exchange rates as of ~~September 30,~~December 31, 2020.

(2)Interest payments on floating rate and foreign currency denominated debt based on the applicable floating rates and/or exchange rates as of ~~September 30,~~December 31, 2020.

The obligations in the above table do not include certain lending commitments to dealers since the amount and timing of future payments is uncertain. Refer to Note 8—Commitments and Contingencies of Notes to Consolidated Financial Statements (Unaudited) for additional information on these commitments.

Our contractual obligations on derivative instruments are also excluded from the table above because our future cash obligations under these contracts are inherently uncertain. We recognize all derivative instruments on our consolidated balance sheet at fair value. The amounts recognized as fair value do not represent the amounts that will be ultimately paid or received upon settlement under these contracts. Refer to Note 5—Derivative Instruments of Notes to Consolidated Financial Statements (Unaudited) for additional information on derivative instruments.

New Accounting Standards

Refer to Note 1—Summary of Business and Significant Accounting Policies of Notes to Consolidated Financial Statements (Unaudited).

Critical Accounting Policies

Critical accounting policies are those accounting policies that require the application of our most difficult, subjective, or complex judgments, often requiring us to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition, cash flows, and results of operations. The impact and any associated risks related to these estimates on our financial condition, cash flows, and results of operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operation” where such estimates affect reported and expected financial results. Different assumptions or changes in economic circumstances could result in additional changes to the determination of the allowance for credit losses and the determination of lease residual values.

Credit Losses

With the adoption of ASC 2016-13, the allowance for credit losses is management’s estimate of lifetime expected credit losses on the amortized cost basis of finance receivables. We have elected not to measure an allowance for credit losses for accrued interest receivables. The allowance is measured on an undiscounted basis. Management evaluates the allowance, at minimum, on a quarterly basis.

5554

The allowance for retail loans is measured on a collective basis. Our historical experience provides the primary basis for estimating the allowance. The modeling methodology used to estimate the allowance incorporates vintage loss and delinquency migration analysis. Retail loans are segmented into pools with similar risk characteristics. Currently, retail loans are segmented by origination quarter, internal credit grade, product type, and original term. Past economic conditions and other attributes of the pools including loan-to-value ratios at loan inception are also taken into consideration when assessing historical credit loss experience. Current and forecasts of future economic factors such as unemployment rates, bankruptcies and used vehicle prices are applied in the modeling to estimate current expected credit losses. Management will also consider qualitative adjustments given the inherent uncertainty in estimating expected credit losses and the imprecision of any modeling methodology.

The allowance for dealer loans is measured at the individual dealer level when they have been specifically identified as impaired. Dealer loans are considered impaired when it is probable that we will be unable to collect the amounts due according to the terms of the applicable contract. Our determination of whether dealer loans are impaired is based on evaluations of the dealership's payment history, financial condition, ability to perform under the terms of the loan agreements, and collateral values as applicable. Expected credit losses on impaired dealer loans is measured based upon the specific circumstances of each dealer considering all expected sources of repayment or the fair value of the collateral if foreclosure is probable. The allowance for dealer loans that have not been specifically identified as impaired is measured collectively primarily using historical loss rates.

Estimated losses on operating leases expected to terminate early due to lessee defaults are also determined collectively using modeling methodologies consistent with those used for retail loans.

Refer to Note 2—Finance Receivables of Notes to Consolidated Financial Statements (Unaudited) for additional information regarding credit losses on retail and dealer loans. Refer to Note 3—Investment in Operating Leases of Notes to Consolidated Financial Statements (Unaudited) for additional information regarding early termination losses on operating leases.

Sensitivity Analysis

Our allowance for credit losses and early termination losses on operating leases requires significant judgment about inherently uncertain factors. The estimates are based on management’s evaluation of many factors, including our historical credit loss experience, the value of the underlying collateral, delinquency trends, and economic conditions. The estimates are based on information available as of each reporting date. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates. 10% and 20% increases in estimated incurred losses on our consumer finance receivables would have resulted in increases to the allowance for credit losses as of ~~September 30,~~December 31, 2020 of ~~$41~~$35 million and ~~$81~~$71 million, respectively. Similarly, 10% and 20% increases in estimated incurred losses due to defaults on operating leases would have resulted in increases to estimated early termination losses as of ~~September 30,~~December 31, 2020 of ~~$17~~$13 million and ~~$33~~$26 million, respectively.

Determination of Lease Residual Values

Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of lease term. We assess our estimates for end of term market values of the leased vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends and market information on new and used vehicles. Our leasing volumes and those across the automotive industry have increased significantly in recent years. As a result, the supply of off-lease vehicles will continue to increase over the next several years which could negatively impact used vehicle prices.

For operating leases, adjustments to estimated residual values are made on a straight-line basis over the remaining term of each lease and recognized as depreciation expense.

5655

Sensitivity Analysis

If future estimated auction values for all outstanding operating leases as of ~~September 30,~~December 31, 2020 were to decrease by $100 per unit from our current estimates, the total impact would be an increase of approximately $73 million in depreciation expense, which would be recognized over the remaining lease terms. If future return rates for all operating leases were to increase by one percentage point from our current estimates, the total impact would be an increase of approximately ~~$13~~$12 million in depreciation expense, which would be recognized over the remaining lease terms. This sensitivity analysis may be asymmetric and is specific to the conditions in effect as of ~~September 30,~~December 31, 2020. Additionally, any declines in auction values are likely to have a negative effect on return rates which could affect the severity of the impact on our results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Principal Executive Officer and Principal Financial Officer have performed an evaluation of our disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Exchange Act, as of ~~September 30,~~December 31, 2020, and each has concluded that such disclosure controls and procedures are effective, at the reasonable assurance level, to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in the internal control over financial reporting during the quarter ended ~~September 30,~~December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

For information on our legal proceedings, see Note 8—Commitments and Contingencies—Legal Proceedings and Regulatory Matters of Notes to Consolidated Financial Statements (Unaudited), which is incorporated by reference herein.

Item 1A. Risk Factors

There are no material changes to the risk factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, which was filed with the SEC on June 22, ~~2020.~~2020, except with respect to the risk factor titled: "A failure or interruption in our operations could adversely affect our results of operations and financial condition" which we hereby supplement with the following information:

In November 2020, we finalized plans to consolidate our nine regional offices in the United States into three customer and dealer services centers located in California, Texas, and Georgia. The consolidation is to take place in stages through the fall of 2022 starting with the consolidation of the California offices in June 2021. Although steps are being taken to mitigate the operational risks related to the consolidation of our regional offices, there is no guarantee that we will not experience any business interruptions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

Item 3. Defaults Upon Senior Securities

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits



Exhibit Number						Description

3.1(1)						Articles of Incorporation of American Honda Finance Corporation, dated February 6, 1980, and Certificates of Amendment to the Articles of Incorporation, dated March 29, 1984, November 13, 1988, December 4, 1989, July 2, 1991, April 3, 1997, November 30, 1999, and December 17, 2003.
3.2(1)						Amended and Restated Bylaws of American Honda Finance Corporation, dated April 27, 2010.
4.1(1)						Form of Specimen Common Stock of American Honda Finance Corporation.
4.2						American Honda Finance Corporation agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to issues of long-term debt of American Honda Finance Corporation and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the American Honda Finance Corporation and its subsidiaries.
4.3(2)						Amended and Restated Issuing and Paying Agency Agreement between American Honda Finance Corporation and The Bank of New York Mellon, dated as of August 27, 2012.
4.4						Trust Indenture between Honda Canada Finance Inc., as issuer, and BNY Trust Company of Canada (as successor to CIBC Mellon Trust Company), as trustee, dated as of September 26, 2005(3), as supplemented by supplemental indentures from time to time, and the Form of Debenture(4).
4.5(5)						Indenture, dated September 5, 2013, between American Honda Finance Corporation and Deutsche Bank Trust Company Americas, as trustee.
4.6(6)						First Supplemental Indenture, dated February 8, 2018, between American Honda Finance Corporation and Deutsche Bank Trust Company Americas, as trustee.
4.7						Form of Fixed Rate Medium-Term Note, Series A(7) and Form of Floating Rate Medium-Term Note, Series A (8).
31.1(9)						Certification of Principal Executive Officer
31.2(9)						Certification of Principal Financial Officer
32.1(10)						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
32.2(10)						Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS(9)						XBRL Instance Document
101.SCH(9)						XBRL Taxonomy Extension Schema Document
101.CAL(9)						XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB(9)						XBRL Taxonomy Extension Label Linkbase Document
101.PRE(9)						XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF(9)						XBRL Taxonomy Extension Definition Linkbase Document

1.Incorporated herein by reference to the same numbered Exhibit filed with our registration statement on Form 10, dated June 28, 2013.

2.Incorporated herein by reference to the same numbered Exhibit filed with our registration statement on Form 10, amendment No. 1, dated August 7, 2013.

3.Incorporated herein by reference to Exhibit number 4.5 filed with our registration statement on Form 10, amendment No. 1, dated August 7, 2013.

4.Incorporated herein by reference to the same numbered Exhibit filed with our quarterly report on Form 10-Q, dated February 12, 2015.

5.Incorporated herein by reference to Exhibit number 4.1 filed with our registration statement on Form S-3, dated September 5, 2013.

6.Incorporated herein by reference to Exhibit number 4.6 filed with our quarterly report on Form 10-Q, dated February 8, 2018.

7.Incorporated herein by reference to Exhibit number 4.1 filed with our current report on Form 8-K, dated August 8, 2019.

8.Incorporated herein by reference to Exhibit number 4.2 filed with our current report on Form 8-K, dated August 8, 2019.

9.Filed herewith.

10.Furnished herewith.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~November 10, 2020~~February 11, 2021

AMERICAN HONDA FINANCE CORPORATION

By:

/s/ Paul C. Honda

Paul C. Honda

Vice President and Assistant Secretary
(Principal Accounting Officer)

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