Loading...
Docoh

American Honda Finance

Filed: 10 Aug 20, 2:18pm


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 June 30, 2020
OR
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)
  
  
California95-3472715
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
  
20800 Madrona Avenue, Torrance, California90503
(Address of principal executive offices)(Zip Code)
 
(310) 972-2555
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of exchange on which registered
1.300% Medium-Term Notes, Series A
Due March 21, 2022
N/ANew York Stock Exchange
2.625% Medium-Term Notes, Series A
Due October 14, 2022
N/ANew York Stock Exchange
1.375% Medium-Term Notes, Series A
Due November 10, 2022
N/ANew York Stock Exchange
0.550% Medium-Term Notes, Series A
Due March 17, 2023
N/ANew York Stock Exchange
0.750% Medium-Term Notes, Series A
Due January 17, 2024
N/ANew York Stock Exchange
0.350% Medium-Term Notes, Series A
Due August 26, 2022
N/ANew York Stock Exchange
1.600% Medium-Term Notes, Series A
Due April 20, 2022
N/ANew York Stock Exchange
1.950% Medium-Term Notes, Series A
Due October 18, 2024
N/ANew 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 July 31, 2020, 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 June 30, 2020
Table of Contents
    Page
PART I – FINANCIAL INFORMATION  
  
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
  
   
   
   
   
   
   
   
   
   
  
  
PART II – OTHER INFORMATION 
  
  
  
  
  
  
  
  
  

i




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.


ii


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)

  June 30, 2020 March 31, 2020
Assets    
Cash and cash equivalents $3,022
 $1,503
Finance receivables, net 38,090
 39,554
Investment in operating leases, net 33,730
 33,843
Due from Parent and affiliated companies 159
 93
Income taxes receivable 169
 137
Other assets 1,451
 1,378
Derivative instruments 928
 748
Total assets $77,549
 $77,256
Liabilities and Equity    
Debt $49,679
 $50,132
Due to Parent and affiliated companies 125
 72
Income taxes payable 264
 239
Deferred income taxes 6,723
 6,589
Other liabilities 1,781
 1,689
Derivative instruments 980
 972
Total liabilities 59,552
 59,693
Commitments and contingencies (Note 8) 
 
Shareholder’s equity:    
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding
     13,660,000 shares as of June 30, 2020 and March 31, 2020
 1,366
 1,366
Retained earnings 15,735
 15,395
Accumulated other comprehensive loss (137) (175)
Total shareholder’s equity 16,964
 16,586
Noncontrolling interest in subsidiary 1,033
 977
Total equity 17,997
 17,563
Total liabilities and equity $77,549
 $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.
 
  June 30, 2020 March 31, 2020
Finance receivables, net $9,584
 $9,645
Investment in operating leases, net 489
 493
Other assets 565
 598
Total assets $10,638
 $10,736
Secured debt $9,703
 $9,748
Other liabilities 9
 9
Total liabilities $9,712
 $9,757

 See accompanying Notes to Consolidated Financial Statements (Unaudited).


1



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(U.S. dollars in millions)
 
  Three months ended June 30,
  2020 2019
Revenues:    
Retail $407
 $433
Dealer 32
 65
Operating leases 1,905
 1,895
Total revenues 2,344
 2,393
Leased vehicle expenses 1,436
 1,392
Interest expense 264
 322
Net revenues 644
 679
Other income, net 12
 20
Total net revenues 656
 699
Expenses:    
General and administrative expenses 112
 121
Provision for credit losses 3
 48
Early termination loss on operating leases (56) 24
(Gain)/Loss on derivative instruments (93) 31
Loss on foreign currency revaluation of debt 107
 38
Total expenses 73
 262
Income before income taxes 583
 437
Income tax expense 147
 138
Net income 436
 299
Less: Net income attributable to noncontrolling interest 23
 27
Net income attributable to
American Honda Finance Corporation
 $413
 $272
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(U.S. dollars in millions)
 
  Three months ended June 30,
  2020 2019
Net income $436
 $299
Other comprehensive income:    
Foreign currency translation adjustment 73
 38
Comprehensive income 509
 337
Less: Comprehensive income/(loss) attributable to noncontrolling interest 58
 45
Comprehensive income attributable to
American Honda Finance Corporation
 $451
 $292
  
See accompanying Notes to Consolidated Financial Statements (Unaudited).



2



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
Balance at March 31, 2019 $17,268
 $15,088
 $(118) $1,366
 $932
Net income 299
 272
 
 
 27
Other comprehensive loss 38
 
 20
 
 18
Balance at June 30, 2019 $17,605
 $15,360
 $(98) $1,366
 $977
           
Balance at March 31, 2020 $17,563
 $15,395
 $(175) $1,366
 $977
Net income 436
 413
 
 
 23
Other comprehensive income 73
 
 38
 
 35
Adoption of accounting standard (Note 1) (75) (73) 
 
 (2)
Balance at June 30, 2020 $17,997
 $15,735
 $(137) $1,366
 $1,033
 
See accompanying Notes to Consolidated Financial Statements (Unaudited).


3




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
  Three months ended June 30,
  2020 2019
Cash flows from operating activities:    
Net income $436
 $299
Adjustments to reconcile net income to net cash provided by operating activities:    
Debt and derivative instrument valuation adjustments (47) 56
Provision for credit losses 3
 48
Early termination loss on operating leases (56) 24
Depreciation on leased vehicles 1,416
 1,406
Accretion of unearned subsidy income (361) (429)
Amortization of deferred dealer participation and other deferred costs 88
 88
Gain on disposition of leased vehicles (8) (43)
Deferred income taxes 148
 84
Changes in operating assets and liabilities:    
Income taxes receivable/payable (7) 8
Other assets (83) (10)
Accrued interest/discounts on debt 30
 19
Other liabilities 52
 (4)
Due to/from Parent and affiliated companies (14) 58
Net cash provided by operating activities 1,597
 1,604
Cash flows from investing activities:    
Finance receivables acquired (4,424) (4,489)
Principal collected on finance receivables 4,244
 4,230
Net change in wholesale loans 1,624
 113
Purchase of operating lease vehicles (3,063) (4,634)
Disposal of operating lease vehicles 2,035
 3,067
Cash received for unearned subsidy income 276
 306
Other investing activities, net (2) (1)
Net cash provided by/(used in) investing activities 690
 (1,408)
 
Statement continues on the next page.

4




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
  Three months ended June 30,
  2020 2019
Cash flows from financing activities:    
Proceeds from issuance of commercial paper $12,328
 $8,148
Paydown of commercial paper (12,814) (9,683)
Proceeds from issuance of short-term debt 214
 300
Paydown of short-term debt (433) (1,100)
Proceeds from issuance of related party debt 435
 746
Paydown of related party debt (613) (746)
Proceeds from issuance of medium-term notes and other debt 1,844
 2,119
Paydown of medium-term notes and other debt (1,692) (151)
Proceeds from issuance of secured debt 1,246
 1,496
Paydown of secured debt (1,330) (1,305)
Net cash used in financing activities (815) (176)
Effect of exchange rate changes on cash and cash equivalents 14
 1
Net increase in cash and cash equivalents 1,486
 21
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 $3,571
 $1,404
Supplemental disclosures of cash flow information:    
Interest paid $214
 $245
Income taxes paid $8
 $14
 
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.
  June 30,
  2020 2019
Cash and cash equivalents $3,022
 $783
Restricted cash included in other assets (1)
 549
 621
Total $3,571
 $1,404
---------------------------------------------------------
(1)Restricted cash balances relate primarily to securitization arrangements (Note 9).

See accompanying Notes to Consolidated Financial Statements (Unaudited).



5



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




(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 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. 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 is effective immediately 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.


6



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 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 receivables. 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, product type, and original term. Past economic conditions and other attributes of the pools including loan-to-value ratios and external credit scores 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, used vehicle prices, and consumer debt service burdens 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 contract. 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.


 

7



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(2) Finance Receivables
Finance receivables consisted of the following:
  June 30, 2020
  Retail Dealer Total
       
 (U.S. dollars in millions)
Finance receivables $35,036
 $3,819
 $38,855
Allowance for credit losses (425) (9) (434)
Deferred dealer participation and other deferred costs 431
 
 431
Unearned subsidy income (762) 
 (762)
Finance receivables, net $34,280
 $3,810
 $38,090
       
  March 31, 2020
  Retail Dealer Total
       
 (U.S. dollars in millions)
Finance receivables $34,623
 $5,606
 $40,229
Allowance for credit losses (364) (6) (370)
Deferred dealer participation and other deferred costs 441
 
 441
Unearned subsidy income (746) 
 (746)
Finance receivables, net $33,954
 $5,600
 $39,554
 
Finance receivables include retail loans with a net carrying amount of $9.6 billion as of both June 30, 2020 and March 31, 2020, 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 as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.

8



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:
  Three months ended June 30, 2020
  Retail Dealer Total
       
 (U.S. dollars in millions)
Beginning balance $364
 $6
 $370
Cumulative effective of adopting ASU 2016-13 98
 3
 101
Balance as of April 1, 2020 462
 9
 471
Provision 3
 
 3
Charge-offs (66) 
 (66)
Recoveries 26
 
 26
Effect of translation adjustment 
 
 
Ending balance $425
 $9
 $434
       
  Three months ended June 30, 2019
  Retail Dealer Total
       
 (U.S. dollars in millions)
Beginning balance $193
 $8
 $201
Provision 37
 11
 48
Charge-offs (64) (8) (72)
Recoveries 27
 
 27
Effect of translation adjustment 
 
 
Ending balance $193
 $11
 $204
 
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 three months ended June 30, 2020 reflected a significant increase in expected credit losses 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 had a severe adverse impact to 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 that was forecasted to peak in the first quarter of fiscal year 2021. Net charge-offs during the three months ended June 30, 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 June 30, 2020 were largely consistent with those applied at the beginning of the period. The allowance for retail loans acquired during the three months ended June 30, 2020 is generally lower relative to loans acquired prior to the onset of COVID-19.
There were no modifications to the terms of dealer loan contracts that constituted troubled debt restructurings during the three months ended June 30, 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 three months ended June 30, 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 also granted to certain customers impacted by COVID-19 beginning in mid-March 2020. 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. Approximately 219,000 retail loans have been granted payment deferrals through the end of June 2020. Customers who are taking advantage of the deferrals are not considered delinquent during such deferral periods and therefore are 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:

9



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


  
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)
June 30, 2020            
Retail loans:            
New auto $136
 $31
 $13
 $180
 $27,850
 $28,030
Used and certified auto 50
 13
 5
 68
 5,189
 5,257
Motorcycle and other 10
 3
 1
 14
 1,404
 1,418
Total retail 196
 47
 19
 262
 34,443
 34,705
Dealer loans:            
Wholesale flooring 1
 
 
 1
 2,924
 2,925
Commercial loans 
 
 
 
 894
 894
Total dealer loans 1
 
 
 1
 3,818
 3,819
Total finance receivables $197
 $47
 $19
 $263
 $38,261
 $38,524
             
March 31, 2020            
Retail loans:            
New auto $222
 $50
 $13
 $285
 $27,495
 $27,780
Used and certified auto 84
 20
 5
 109
 5,174
 5,283
Motorcycle and other 12
 4
 2
 18
 1,237
 1,255
Total retail 318
 74
 20
 412
 33,906
 34,318
Dealer loans:            
Wholesale flooring 1
 
 
 1
 4,529
 4,530
Commercial loans 
 
 
 
 1,076
 1,076
Total dealer loans 1
 
 
 1
 5,605
 5,606
Total finance receivables $319
 $74
 $20
 $413
 $39,511
 $39,924
 
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.


10



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


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  
               
  2021 2020 2019 2018 2017 Prior Total
               
  (U.S. dollars in millions)
Credit grade A $2,683
 $7,520
 $6,043
 $3,332
 $1,624
 $470
 $21,672
Credit grade B 708
 2,006
 1,447
 1,000
 485
 191
 5,837
Credit grade C 492
 1,678
 1,123
 789
 372
 153
 4,607
Credit grade D 141
 806
 506
 329
 156
 72
 2,010
Others 47
 209
 151
 92
 58
 22
 579
Total retail loans $4,071
 $12,219
 $9,270
 $5,542
 $2,695
 $908
 $34,705

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.
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      
                   
  2021 2020 2019 2018 2017 Prior Revolving loans Wholesale Flooring Total
  (U.S. dollars in millions)
Group I $18
 $89
 $8
 $72
 $46
 $157
 $280
 $1,453
 $2,123
Group II 10
 58
 61
 32
 37
 26
 
 1,467
 1,691
Group III 
 
 
 
 
 
 
 5
 5
Total dealer loans $28
 $147
 $69
 $104
 $83
 $183
 $280
 $2,925
 $3,819






11



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


(3) Investment in Operating Leases
Investment in operating leases consisted of the following:
  June 30, 2020 March 31, 2020
     
  (U.S. dollars in millions)
Operating lease vehicles $43,641
 $43,624
Accumulated depreciation (8,520) (8,219)
Deferred dealer participation and initial direct costs 128
 131
Unearned subsidy income (1,291) (1,376)
Estimated early termination losses (228) (317)
Investment in operating leases, net $33,730
 $33,843
 
Operating lease revenue consisted of the following:
  Three months ended June 30,
  2020 2019
     
  (U.S. dollars in millions)
Lease payments $1,675
 $1,637
Subsidy income and dealer rate participation, net 220
 246
Reimbursed lessor costs 10
 12
Total operating lease revenue, net $1,905
 $1,895

Leased vehicle expenses consisted of the following:
  Three months ended June 30,
  2020 2019
     
  (U.S. dollars in millions)
Depreciation expense $1,416
 $1,406
Initial direct costs and other lessor costs 28
 29
Gain on disposition of leased vehicles (1)
 (8) (43)
Total leased vehicle expenses, net $1,436
 $1,392
________________________
(1)Included in the gain on disposition of leased vehicles are end of term charges of $19 million and $28 million for the three months ended June 30, 2020 and 2019.
Investment in operating leases includes lease assets with a net carrying amount of $489 million and $493 million as of June 30, 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 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 June 30, 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 June 30, 
(U.S. dollars in millions)

   
2021 $5,749
2022 3,921
2023 1,444
2024 233
2025 43
Total $11,390


12



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The Company recognized a reversal of early termination losses on operating leases of $56 million during the three months ended June 30, 2020 and recognized early termination losses on operating leases of $24 million during the three months ended June 30, 2019. The reversal of early termination losses during the first quarter of fiscal year 2021 was the result of applying qualitative adjustments to reduce the effect of higher unemployment rates in the modeling results. Actual net losses realized totaled $33 million and $24 million for the three months ended June 30, 2020 and 2019, respectively.
The general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $14 million and $6 million during the three months ended June 30, 2020 and 2019, respectively.
During the three months ended June 30, 2020, the Company considered the impact of COVID-19 on estimated residual values and determined that impairment conditions were not met. No impairment losses due to declines in estimated residual values were recognized during the three months ended June 30, 2020 and 2019.

13



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(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
  June 30, 2020 March 31, 2020 June 30, 2020 March 31, 2020 June 30, 2020 March 31, 2020
             
  (U.S. dollars in millions)        
Unsecured debt:            
Commercial paper $5,034
 $5,490
 1.19% 1.81% 0.40 - 2.36% 1.01 - 2.31%
Related party debt 368
 533
 0.93% 1.76% 0.56 - 1.53% 1.45 - 2.06%
Bank loans 5,288
 4,938
 1.24% 2.16% 0.87 - 1.86% 1.44 - 2.55%
Private MTN program 999
 999
 3.84% 3.84% 3.80 - 3.88% 3.80 - 3.88%
Public MTN program 25,023
 25,130
 1.87% 2.07% 0.35 - 3.63% 0.35 - 3.63%
Euro MTN programme 28
 28
 2.23% 2.23% 2.23 - 2.23% 2.23 - 2.23%
Other debt 3,236
 3,266
 2.27% 2.47% 0.84- 3.44% 1.73 - 3.44%
Total unsecured debt 39,976
 40,384
        
Secured debt 9,703
 9,748
 1.95% 2.25% 0.27 - 3.30% 1.36 - 3.30%
Total debt $49,679
 $50,132
        
 
As of June 30, 2020, the outstanding principal balance of long-term debt with floating interest rates totaled $12.0 billion, long-term debt with fixed interest rates totaled $31.4 billion, and short-term debt with floating and fixed interest rates totaled $6.3 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 June 30, 2020 and March 31, 2020, the Company had commercial paper programs that provide the Company with available funds of up to $8.8 billion, 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 $4.6 billion and $5.9 billion during the three months ended June 30, 2020 and 2019, respectively. The maximum balance outstanding at any month-end during the three months ended June 30, 2020 and 2019 was $5.0 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 million and $4 million for the three months ended June 30, 2020 and 2019, respectively.

Bank Loans
Outstanding bank loans at June 30, 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 June 30, 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.
Medium-Term Note (MTN) Programs
Private MTN Program
AHFC no longer issues MTNs under its Rule 144A Private MTN Program. Notes outstanding under the Private MTN Program as of June 30, 2020 were long-term, with fixed interest rates, 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.

14



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


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 June 30, 2020 were either long-term or short-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 one note outstanding under this program as of June 30, 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 June 30, 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 contains 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 June 30, 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 June 30, 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 $1.5 billion syndicated bank credit facility which provides that HCFI may borrow up to $737 million on a one-year revolving basis and up to $737 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 June 30, 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 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.
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 June 30, 2020, no amounts were drawn upon under these agreements. These agreements expire in September 2020. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates. 

15



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(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.
 
  June 30, 2020 March 31, 2020
  
Notional
balances
 Assets Liabilities 
Notional
balances
 Assets Liabilities
             
  (U.S. dollars in millions)
Interest rate swaps $56,254
 $800
 $880
 $57,379
 $704
 $830
Cross currency swaps 5,638
 128
 100
 4,001
 44
 142
Gross derivative assets/liabilities   928
 980
   748
 972
Collateral posted/held   55
 10
   45
 9
Counterparty netting adjustment   (869) (869)   (764) (764)
Net derivative assets/liabilities   $114
 $121
   $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 June 30,
  2020 2019
     
  (U.S. dollars in millions)
Interest rate swaps $(9) $(76)
Cross currency swaps 102
 45
Total gain/(loss) on derivative instruments $93
 $(31)
 
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.

16



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(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 June 30,
Income Statement 2020 2019
     
  (U.S. dollars in millions)
Revenue:    
Subsidy income $359
 $427
Interest expense:    
Related party debt 1
 4
Other income, net:    
VSC administration fees 26
 27
Support Service Fee (11) (9)
General and administrative expenses:    
Support Compensation Agreement fees 17
 17
Benefit plan expenses 2
 2
Shared services 18
 16

Balance Sheet June 30, 2020 March 31, 2020
     
  (U.S. dollars in millions)
Assets:
    
Finance receivables, net:    
Unearned subsidy income $(754) $(738)
Investment in operating leases, net:    
Unearned subsidy income (1,287) (1,372)
Due from Parent and affiliated companies 159
 93
Liabilities:    
Debt:    
Related party debt $368
 $533
Due to Parent and affiliated companies 125
 72
Accrued interest expense:    
Related party debt 1
 1
Other liabilities:    
Unearned VSC administrative fees 352
 363
Accrued benefit expenses 70
 69
 
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.

17



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


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).
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.

18



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


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 both the three months ended June 30, 2020 and 2019, the Company recognized $3 million 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 June 30, 2020 and March 31, 2019 related to incentive financing program subsidies. The majority of the amounts due to the Parent and affiliated companies at June 30, 2020 and March 31, 2019 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.
In July 2020, AHFC declared and paid a cash dividend of $143 million to its parent, AHM.


(7) Income Taxes
The Company's effective tax rate was 25.2% and 31.6%, for the three months ended June 30, 2020 and 2019, respectively. The reduction in the comparable period effective tax rates for the three months ended June 30, 2020 and 2019 was primarily due to unrecognized tax benefits recorded during the three months ended June 30, 2019 to reflect additional Internal Revenue Service (IRS) guidance related to the Tax Cuts and Jobs Act. The Company’s effective tax rate for the three months ended June 30, 2020, differs from the U.S. federal statutory tax rate primarily as a result of U.S. state taxes.
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 June 30, 2020, $938 million of accumulated undistributed earnings of HCFI were intended to be so reinvested. If the undistributed earnings as of June 30, 2020 were to be distributed, the tax liability associated with these earnings would be $35 million, inclusive of currency translation adjustments.
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 COVID-19 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. During the three months ended June 30, 2020, several 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 June 30, 2020 income tax accounts.
As of June 30, 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 2019. The Company’s Canadian subsidiary, HCFI, is subject to examination for returns filed for the taxable years ended March 31, 2013 through 2019 federally, and returns filed for the taxable years ended March 31, 2008 through 2019, except for 2011, provincially. The Company believes an appropriate provision has 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.


19



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(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. 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 June 30, 2020, maturities of operating lease liabilities were as follows:
Twelve month periods ending June 30, 
(U.S. dollars in millions)

   
2021 $11
2022 9
2023 8
2024 8
2025 7
Thereafter 16
Total undiscounted future lease obligations 59
Less: imputed interest (6)
Operating lease liabilities $53

Rent expense under operating leases was $2 million and $3 million for the three months ended June 30, 2020 and 2019, respectively. Rent expense is included within general and administrative expenses.
As of June 30, 2020, the weighted average remaining lease term for operating leases was 6.8 years and the weighted average remaining discount rate for operating leases was 3.05%.
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 $566 million as of June 30, 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 June 30, 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.

20



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 two 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.

(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 three months ended June 30, 2020 and 2019, the Company issued notes through asset-backed securitizations, which were accounted for as secured financing transactions totaling $1.3 billion and $1.5 billion, respectively. The notes were secured by assets with an initial balance of $1.3 billion and $1.6 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.
 
  June 30, 2020
           
  Assets Liabilities
           
  (U.S. dollars in millions)
  Securitized assets 
Restricted cash (1)
 Other Secured debt Other
Retail loan securitizations $9,584
 $548
 $15
 $9,306
 $7
Operating lease securitizations 489
 1
 1
 397
 2
Total $10,073
 $549
 $16
 $9,703
 $9
           
  March 31, 2020
           
  Assets Liabilities
           
  (U.S. dollars in millions)
  Securitized assets 
Restricted cash (1)
 Other Secured debt Other
Retail loan securitizations $9,645
 $581
 $16
 $9,345
 $7
Operating lease securitizations 493
 1
 
 403
 2
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 June 30, 2020 and March 31, 2020, AHFC and HCFI had combined cash collections of $500 million and $468 million, respectively, which were required to be remitted to the SPEs.

21



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(10) Other Assets
Other assets consisted of the following:
 
  June 30, 2020 March 31, 2020
     
  (U.S. dollars in millions)
Interest receivable and other assets $118
 $107
Vehicles held for disposition 207
 228
Other receivables 292
 172
Deferred expense 106
 105
Software, net of accumulated amortization of $159 and $156 as of June 30, 2020 and March 31, 2020, respectively 24
 23
Property and equipment, net of accumulated depreciation of $23 as of both June 30, 2020 and March 31, 2020 4
 4
Restricted cash 549
 582
Operating lease assets 46
 48
Like-kind exchange assets 91
 91
Other miscellaneous assets 14
 18
Total $1,451
 $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 $3 million for both three months ended June 30, 2020 and 2019.

(11) Other Liabilities
Other liabilities consisted of the following:
 
  June 30, 2020 March 31, 2020
     
  (U.S. dollars in millions)
Dealer payables $166
 $68
Accrued interest expense 179
 138
Accounts payable and accrued expenses 402
 408
Lease security deposits 83
 84
Unearned VSC administrative fees (Note 6) 352
 363
Unearned income, operating leases 333
 358
Operating lease liabilities 53
 55
Uncertain tax positions 193
 195
Other liabilities 20
 20
Total $1,781
 $1,689
 

22



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(12) Other Income, net
Other income consisted of the following: 
  Three months ended June 30,
  2020 2019
     
  (U.S. dollars in millions)
VSC administration fees (Note 6) $26
 $27
Other, net (14) (7)
Total $12
 $20
 

(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.

23



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



Recurring Fair Value Measurements
The following tables summarize the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis:
 
  June 30, 2020
  Level 1 Level 2 Level 3 Total
         
  (U.S. dollars in millions)
Assets:        
Derivative instruments:        
Interest rate swaps $
 $800
 $
 $800
Cross currency swaps 
 128
 
 128
Total assets $
 $928
 $
 $928
Liabilities:        
Derivative instruments:        
Interest rate swaps $
 $880
 $
 $880
Cross currency swaps 
 100
 
 100
Total liabilities $
 $980
 $
 $980
         
  March 31, 2020
  Level 1 Level 2 Level 3 Total
         
  (U.S. dollars in millions)
Assets:        
Derivative instruments:        
Interest rate swaps $
 $704
 $
 $704
Cross currency swaps 
 44
 ��
 44
Total assets $
 $748
 $
 $748
Liabilities:        
Derivative instruments:        
Interest rate swaps $
 $830
 $
 $830
Cross currency swaps 
 142
 
 142
Total liabilities $
 $972
 $
 $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 three months ended June 30, 2020 and 2019. Refer to Note 5 for additional information on derivative instruments.

24



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
           
  (U.S. dollars in millions)
June 30, 2020          
Vehicles held for disposition $
 $
 $131
 $131
 $19
June 30, 2019          
Vehicles held for disposition $
 $
 $136
 $136
 $27
 
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.
 

25



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


  June 30, 2020
  Carrying Fair value
  value Level 1 Level 2 Level 3 Total
           
  (U.S. dollars in millions)
Assets:          
Cash and cash equivalents $3,022
 $3,022
 $
 $
 $3,022
Dealer loans, net 3,810
 
 
 3,542
 3,542
Retail loans, net 34,280
 
 
 35,546
 35,546
Restricted cash 549
 549
 
 
 549
Liabilities:          
Commercial paper $5,034
 $
 $5,038
 $
 $5,038
Related party debt 368
 
 368
 
 368
Bank loans 5,288
 
 5,299
 
 5,299
Medium-term note programs 26,050
 
 26,737
 
 26,737
Other debt 3,236
 
 3,327
 
 3,327
Secured debt 9,703
 
 9,850
 
 9,850
           
  March 31, 2020
  Carrying Fair value
  value Level 1 Level 2 Level 3 Total
           
  (U.S. dollars in millions)
Assets:          
Cash and cash equivalents $1,503
 $1,503
 $
 $
 $1,503
Dealer loans, net 5,600
 
 
 5,136
 5,136
Retail loans, net 33,954
 
 
 34,441
 34,441
Restricted cash 582
 582
 
 
 582
Liabilities:          
Commercial paper $5,490
 $
 $5,488
 $
 $5,488
Related party debt 533
 
 533
 
 533
Bank loans 4,938
 
 4,780
 
 4,780
Medium-term note programs 26,157
 
 25,740
 
 25,740
Other debt 3,266
 
 3,232
 
 3,232
Secured debt 9,748
 
 9,794
 
 9,794
 
Fair value information presented in the tables above is based on information available at June 30, 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.
 

26



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(14) Segment Information
The Company’s reportable segments are based on the two 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 months ended June 30, 2020 and 2019 is summarized in the following tables:
 
  
United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
         
  (U.S. dollars in millions)
Three months ended June 30, 2020        
Revenues:        
Retail $363
 $44
 $
 $407
Dealer 28
 4
 
 32
Operating leases 1,587
 318
 
 1,905
Total revenues 1,978
 366
 
 2,344
Leased vehicle expenses 1,190
 246
 
 1,436
Interest expenses 230
 34
 
 264
Realized (gains)/losses on derivatives and foreign
   currency denominated debt
 53
 9
 (62) 
Net revenues 505
 77
 62
 644
Other income, net 10
 2
 
 12
Total net revenues 515
 79
 62
 656
Expenses:        
General and administrative expenses 98
 14
 
 112
Provision for credit losses 4
 (1) 
 3
Early termination loss on operating leases (61) 5
 
 (56)
(Gain)/Loss on derivative instruments 
 
 (93) (93)
(Gain)/Loss on foreign currency revaluation of debt 
 
 107
 107
Income before income taxes $474
 $61
 $48
 $583
         
June 30, 2020        
Finance receivables, net $33,980
 $4,110
 $
 $38,090
Investment in operating leases, net 28,697
 5,033
 
 33,730
Total assets 67,834
 9,715
 
 77,549
 

27



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 June 30, 2019        
Revenues:        
Retail $382
 $51
 $
 $433
Dealer 59
 6
 
 65
Operating leases 1,565
 330
 
 1,895
Total revenues 2,006
 387
 
 2,393
Leased vehicle expenses 1,142
 250
 
 1,392
Interest expense 277
 45
 
 322
Realized (gains)/losses on derivatives and foreign
   currency denominated debt
 15
 (2) (13) 
Net revenues 572
 94
 13
 679
Other income, net 17
 3
 
 20
Total net revenues 589
 97
 13
 699
Expenses:        
General and administrative expenses 106
 15
 
 121
Provision for credit losses 48
 
 
 48
Early termination loss on operating leases 23
 1
 
 24
(Gain)/Loss on derivative instruments 
 
 31
 31
(Gain)/Loss on foreign currency revaluation of debt 
 
 38
 38
Income before income taxes $412
 $81
 $(56) $437
         
June 30, 2019        
Finance receivables, net $36,074
 $4,535
 $
 $40,609
Investment in operating leases, net 27,618
 5,340
 
 32,958
Total assets 66,547
 10,070
 
 76,617


28



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. 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.

29



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, along with the related changes in consumer behaviors, have resulted 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. We also implemented temporary furloughs and salary reductions in an effort to reduce expenses.
To assist our existing retail loan and lease customers who may have been impacted by COVID-19, we granted payment deferrals to those customers who requested assistance beginning in mid-March 2020. 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. Interest on retail loans continues to accrue during the deferral period. Approximately 219,000 retail loans and 177,000 retail leases have been granted payment deferrals through the end of June 2020, which represents approximately 9% and 11% or outstanding retail loans and retail leases as of June 30, 2020, respectively. Although these payment deferrals have resulted and will continue to result in delays in collections, customers who are taking advantage of the deferrals are not considered delinquent during such deferral periods and therefore are not reflected in our delinquency measures. It is expected that some customers will not be able to make their contractual payments after the deferral period and will ultimately default. Delinquencies, repossessions, and charge-offs on retail loans and realized losses on early terminations of operating leases are expected to begin rising in the second quarter of fiscal year 2021 as more of the payment deferrals expire. In the United States, the payment deferral period for approximately 93% of the retail loans and leases that were granted payment deferrals have expired by the end of July 2020. Approximately 18% of the customers that were required to resume making their payments after the expiration of their deferral period were delinquent as of July 31, 2020, of which approximately 4% were 30 days or more past due.
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 granted deferrals of interest payments on floorplans and principal payments on commercial loans generally for a period of 3 months. Interest 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 recovered 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 in 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, a resurgence in the spread of COVID-19 may result in the reimplementation of certain restrictions, which could adversely impact our business.

30



Results of Operations
The following table presents our income before income taxes:
 
  Three months ended June 30,
  2020 2019
     
  (U.S. dollars in millions)
Income before income taxes:    
United States segment $517
 $359
Canada segment 66
 78
Total income before income taxes $583
 $437

Comparison of the Three Months Ended June 30, 2020 and 2019
Our consolidated income before income taxes was $583 million during the first quarter of fiscal year 2021 compared to $437 million during the same period in fiscal year 2020. This increase of $146 million, or 33%, was due to the following differences:

  Three months ended June 30,    
  2020 2019 Difference % Change
         
  (U.S. dollars in millions)  
Net revenues:        
Retail $407
 $433
 $(26) (6)%
Dealer 32
 65
 (33) (51)%
Operating lease, net of leased vehicle expenses 469
 503
 (34) (7)%
Interest expense (264) (322) 58
 (18)%
Other income, net 12
 20
 (8) (40)%
Total net revenues 656
 699
 (43) (6)%
Expenses:        
General and administrative expenses 112
 121
 (9) (7)%
Provision for credit losses 3
 48
 (45) (94)%
Early termination loss on operating leases (56) 24
 (80) n/m
(Gain)/Loss on derivative instruments (93) 31
 (124) n/m
(Gain)/Loss on foreign currency revaluation of debt 107
 38
 69
 n/m
Total expenses 73
 262
 (189) (72)%
Total income before income taxes $583
 $437
 $146
 33 %
n/m = not meaningful






31



Segment Results—Comparison of the Three Months Ended June 30, 2020 and 2019
Results of operations for the United States segment and the Canada segment are summarized below:
  United States Segment Canada Segment Consolidated
  Three months ended
June 30,
 Three months ended
June 30,
 Three months ended
June 30,
  2020 2019 2020 2019 2020 2019
             
  (U.S. dollars in millions)
Revenues:            
Retail $363
 $382
 $44
 $51
 $407
 $433
Dealer 28
 59
 4
 6
 32
 65
Operating leases 1,587
 1,565
 318
 330
 1,905
 1,895
Total revenues 1,978
 2,006
 366
 387
 2,344
 2,393
Leased vehicle expenses 1,190
 1,142
 246
 250
 1,436
 1,392
Interest expense 230
 277
 34
 45
 264
 322
Net revenues 558
 587
 86
 92
 644
 679
Other income, net 10
 17
 2
 3
 12
 20
Total net revenues 568
 604
 88
 95
 656
 699
Expenses:            
General and administrative expenses 98
 106
 14
 15
 112
 121
Provision for credit losses 4
 48
 (1) 
 3
 48
Early termination loss on operating
     leases
 (61) 23
 5
 1
 (56) 24
(Gain)/Loss on derivative instruments (97) 30
 4
 1
 (93) 31
(Gain)/Loss on foreign currency
     revaluation of debt
 107
 38
 
 
 107
 38
Income before income taxes $517
 $359
 $66
 $78
 $583
 $437
Revenues
Revenue from retail loans in the United States segment decreased by $19 million, or 5%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower yields and lower average outstanding balances. Revenue from retail loans in the Canada segment decreased by $7 million, or 14%, during the first quarter 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.
Operating lease revenue in the United States segment increased by $22 million, or 1%, during the first 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 $12 million, or 4%, during the first 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.
Revenue from dealer loans in the United States segment decreased by $31 million, or 53%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was attributable to lower yields and lower average outstanding balances. Revenue from dealer loans in the Canada segment decreased by $2 million, or 33%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in revenue was primarily due to lower yields.
Consolidated subsidy income from AHM and HCI sponsored incentive programs decreased by $68 million, or 16%, to $359 million during the first quarter of fiscal year 2021 compared to $427 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.

32



Leased vehicle expenses
Leased vehicle expenses in the United States segment increased by $48 million, or 4%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The increase was attributable to the increase in depreciation due to higher average outstanding operating leases partially offset by lower gains on disposition of leased vehicles due to the negative impact on used vehicle prices caused by the suspension of physical auctions. Leased vehicle expenses in the Canada segment decreased by $4 million, or 2%, during the first quarter 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.
Interest expense
Interest expense in the United States segment decreased by $47 million, or 17%, during the first 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 $11 million, or 24%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease was attributable to lower average interest rates, lower average outstanding debt and the effect of foreign currency translation adjustments. See “—Liquidity and Capital Resources” below for more information.
Provision for credit losses
The provision for credit losses in the United States segment decreased by $44 million, or 92%, during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. The decrease in the provision for credit losses is primarily attributable to the decrease in the provision for retail loans of $33 million due to lower than expected net charge-offs and a reduction of expected credit losses during the first quarter of fiscal year 2021. The provision for credit losses in the Canada segment decreased by $1 million during the first quarter 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.
Early termination loss on operating leases
In the United States segment, we recognized a reversal of early termination losses on operating leases of $61 million, during the first quarter of fiscal year 2021 compared to losses of $23 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of revising the estimated impact of COVID-19 on early termination losses. Early termination losses on operating leases in the Canada segment increased by $4 million during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020 due to our increased estimates of the impact of COVID-19 on early termination losses. 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 $97 million during the first quarter of fiscal year 2021 compared to a loss of $30 million during the same period in fiscal year 2020. The gain in the first quarter of fiscal year 2021 was attributable to a gain on cross currency swaps of $102 million and a gain on pay float interest rate swaps of $64 million, partially offset by a loss on pay fixed interest rate swaps of $69 million. The gain on cross currency swaps during the first quarter 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 quarter 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 $4 million during the first quarter of fiscal year 2021 compared to a loss of $1 million during the same period in fiscal year 2020. The loss in the first 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 $107 million during the first quarter of fiscal year 2021 compared to a loss of $38 million during the same period in fiscal year 2020. The loss in the first quarter of fiscal year 2021 was primarily due to the U.S. dollar weakening against the Euro and Sterling during the period.

33



Income tax expense
The consolidated effective tax rate was 25.2% for the first quarter of fiscal year 2021 and 31.6% for the same period in fiscal year 2020. The reduction in the comparable period effective tax rates for the three months ended June 30, 2020 and 2019 was primarily due to unrecognized tax benefits recorded during the three months ended June 30, 2019 to reflect additional Internal Revenue Service (IRS) guidance related to the Tax Cuts and Jobs Act. The Company’s effective tax rate for the three-month period ended June 30, 2020, differs from the U.S. federal statutory tax rate primarily as a result of U.S. state taxes. For additional information regarding income taxes, see Note 7—Income Taxes of Notes to Consolidated Financial Statements (Unaudited).


34




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 June 30,
  2020 2019
  Acquired 
Sponsored (2)
 Acquired 
Sponsored (2)
         
  
(Units (1) in thousands)
United States Segment        
Retail loans:        
New auto 110
 91
 103
 57
Used auto 23
 10
 38
 9
Motorcycle and other 32
 
 23
 1
Total retail loans 165
 101
 164
 67
Leases 96
 83
 141
 111
         
Canada Segment        
Retail loans:        
New auto 9
 8
 17
 16
Used auto 2
 
 1
 
Motorcycle and other 3
 3
 3
 3
Total retail loans 14
 11
 21
 19
Leases 10
 10
 27
 26
         
Consolidated        
Retail loans:        
New auto 119
 99
 120
 73
Used auto 25
 10
 39
 9
Motorcycle and other 35
 3
 26
 4
Total retail loans 179
 112
 185
 86
Leases 106
 93
 168
 137
_______________________
  
(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.

35



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 June 30,
  2020 2019
United States Segment    
New auto 70% 60%
Motorcycle 34% 34%
     
Canada Segment    
New auto 66% 82%
Motorcycle 24% 29%
     
Consolidated    
New auto 70% 62%
Motorcycle 33% 33%



36



Consumer Financing Asset Balances
The following table summarizes our outstanding retail loan and lease asset balances and units:
 
  June 30,
2020
 March 31,
2020
 June 30,
2020
 March 31,
2020
         
  (U.S. dollars in millions) 
(Units (1) in thousands)
United States Segment        
Retail loans:        
New auto $24,517
 $24,353
 1,510
 1,510
Used auto 4,947
 4,999
 357
 356
Motorcycle and other 1,290
 1,145
 201
 192
Total retail loans $30,754
 $30,497
 2,068
 2,058
Investment in operating leases $28,697
 $28,809
 1,307
 1,318
         
Securitized retail loans (2)
 $8,960
 $8,977
 698
 703
         
Canada Segment        
Retail loans:        
New auto $3,235
 $3,195
 252
 258
Used auto 191
 178
 23
 24
Motorcycle and other 100
 84
 21
 20
Total retail loans $3,526
 $3,457
 296
 302
Investment in operating leases $5,033
 $5,034
 288
 296
         
Securitized retail loans (2)
 $624
 $668
 56
 58
Securitized investments in operating leases (2)
 $489
 $493
 24
 24
         
Consolidated        
Retail loans:        
New auto $27,752
 $27,548
 1,762
 1,768
Used auto 5,138
 5,177
 380
 380
Motorcycle and other 1,390
 1,229
 222
 212
Total retail loans $34,280
 $33,954
 2,364
 2,360
Investment in operating leases $33,730
 $33,843
 1,595
 1,614
         
Securitized retail loans (2)
 $9,584
 $9,645
 754
 761
Securitized investments in operating leases (2)
 $489
 $493
 24
 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 1% during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to the increase in sponsored new auto loan acquisition volumes. Lease acquisition volumes decreased by 32% during the first quarter 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 decreased by 33% during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020 primarily due to the decline in sponsored new auto loan acquisition volumes. Lease acquisition volumes decreased by 63% during the first quarter of fiscal year 2021 compared to the same period in fiscal year 2020 due to the decrease in sponsored program volumes. The overall decrease in consumer financing acquisition volumes was due to the impact of COVID-19. See “—COVID-19 Pandemic above.

37



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:
 
  June 30,
2020
 March 31,
2020
United States Segment    
Automobile 29% 29%
Motorcycle 97% 97%
Other 17% 16%
     
Canada Segment    
Automobile 34% 36%
Motorcycle 95% 96%
Other 92% 93%
     
Consolidated    
Automobile 30% 30%
Motorcycle 97% 97%
Other 19% 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 June 30,
  2020 2019
United States Segment    
Automobile 21% 27%
Motorcycle 98% 97%
Other 10% 9%
     
Canada Segment    
Automobile 32% 32%
Motorcycle 88% 91%
Other 97% 96%
     
Consolidated    
Automobile 22% 28%
Motorcycle 97% 96%
Other 15% 13%

38



Dealer Financing Asset Balances
The following table summarizes our outstanding dealer financing asset balances and units:
 
  June 30,
2020
 March 31,
2020
 June 30,
2020
 March 31,
2020
         
  (U.S. dollars in millions) 
(Units (1) in thousands)
United States Segment        
Wholesale flooring loans:        
Automobile $1,942
 $3,049
 71
 109
Motorcycle 404
 760
 47
 96
Other 48
 55
 44
 56
Total wholesale flooring loans $2,394
 $3,864
 162
 261
Commercial loans $832
 $1,020
    
         
Canada Segment        
Wholesale flooring loans:        
Automobile $442
 $547
 16
 21
Motorcycle 62
 91
 8
 13
Other 24
 24
 25
 27
Total wholesale flooring loans $528
 $662
 49
 61
Commercial loans $56
 $54
    
         
Consolidated        
Wholesale flooring loans:        
Automobile $2,384
 $3,596
 87
 130
Motorcycle 466
 851
 55
 109
Other 72
 79
 69
 83
Total wholesale flooring loans $2,922
 $4,526
 211
 322
Commercial loans $888
 $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.

39



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:
 

40



  As of or for the
three months ended
June 30,
  2020 2019
     
  (U.S. dollars in millions)
United States Segment    
Finance receivables:    
Allowance for credit losses at beginning of period (4)
 $456
 $194
Provision for credit losses 4
 48
Charge-offs, net of recoveries (39) (44)
Allowance for credit losses at end of period $421
 $198
Allowance as a percentage of ending receivable balance (1)
 1.22% 0.54%
Charge-offs as a percentage of average receivable balance (1), (3)
 0.45% 0.50%
Delinquencies (60 or more days past due):    
Delinquent amount (2)
 $64
 $134
As a percentage of ending receivable balance (1), (2)
 0.18% 0.37%
Operating leases:    
Early termination loss on operating leases $(61) $23
Canada Segment    
Finance receivables:    
Allowance for credit losses at beginning of period (4)
 15
 7
Provision for credit losses (1) 
Charge-offs, net of recoveries (1) (1)
Effect of translation adjustment 
 
Allowance for credit losses at end of period $13
 $6
Allowance as a percentage of ending receivable balance (1)
 0.3% 0.12%
Charge-offs as a percentage of average receivable balance (1), (3)
 0.14% 0.07%
Delinquencies (60 or more days past due):    
Delinquent amount (2)
 3
 5
As a percentage of ending receivable balance (1), (2)
 0.07% 0.10%
Operating leases:    
Early termination loss on operating leases $5
 $1
Consolidated    
Finance receivables:    
Allowance for credit losses at beginning of period (4)
 $471
 $201
Provision for credit losses 3
 48
Charge-offs, net of recoveries (40) (45)
Effect of translation adjustment 
 
Allowance for credit losses at end of period $434
 $204
Allowance as a percentage of ending receivable balance (1)
 1.12% 0.49%
Charge-offs as a percentage of average receivable balance (1), (3)
 0.42% 0.45%
Delinquencies (60 or more days past due):    
Delinquent amount (2)
 66
 139
As a percentage of ending receivable balance (1), (2)
 0.17% 0.34%
Operating leases:    
Early termination loss on operating leases $(56) $24
_______________________
   
(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. Finance receivables that were granted payment deferrals are not considered delinquent and are therefore excluded from these delinquency measures. See above under "—COVID-19 Pandemic” for additional information.
(3)Percentages for the three months ended June 30, 2020 and 2019 have been annualized.
(4)Beginning allowance for the three months ended June 30, 2020 includes the cumulative effect of adopting ASU 2016-13.

41



In the United States segment, the provision for credit losses on our finance receivables was $4 million during the first quarter of fiscal year 2021 compared to $48 million during the same period in fiscal year 2020. The decrease in the provision for credit losses was primarily attributable to the decrease in the provision for retail loans of $33 million. Net charge-offs during the first quarter 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 quarter of fiscal year 2021 were lower compared to the same period in fiscal year 2020 due in part to payment deferrals that were 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 $61 million during the first quarter of fiscal year 2021 compared to losses of $23 million during the same period in fiscal year 2020. The reversal of early termination losses was the result of applying qualitative adjustments to reduce the effect of higher unemployment rates in the modeling results during the first quarter of fiscal year 2021. See above under “—COVID-19 Pandemic” for additional information.
In the Canada segment, we recognized a credit of $1 million to our provision for credit losses on our finance receivables during the first quarter of fiscal year 2021 compared to a less than $1 million provision for credit losses on our finance receivables during the same period in fiscal year 2020. Early termination losses on operating lease assets was $5 million during the first quarter of fiscal year 2021 compared to $1 million during the same period in fiscal year 2020. Early termination losses increased due to our increased estimates of the impact of COVID-19 on estimated early termination losses.
Lease Residual Value Risk
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 for a market based price. Returned lease vehicles that are not purchased by the grounding dealers 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.
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 PoliciesDetermination 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 carrying values exceed their fair values. We did not recognize impairment losses due to declines in estimated residual values during the first quarter of fiscal year 2021 or the same period in fiscal year 2020.


42



The following table summarizes our number of lease terminations and the method of disposition:
 
  Three months ended June 30,
  2020 2019
     
  
(Units (1) in thousands)
United States Segment    
Termination units:    
Sales at outstanding contractual balances (2)
 64
 101
Sales through auctions and dealer direct programs (3)
 38
 54
Total termination units 102
 155
     
Canada Segment    
Termination units:    
Sales at outstanding contractual balances (2)
 15
 23
Sales through auctions and dealer direct programs (3)
 3
 2
Total termination units 18
 25
     
Consolidated    
Termination units:    
Sales at outstanding contractual balances (2)
 79
 124
Sales through auctions and dealer direct programs (3)
 41
 56
Total termination units 120
 180
_______________________
  
  
(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.

43



The summary of outstanding debt presented in the tables and discussion below in this section “—Liquidity and Capital Resources” as of June 30, 2020 and March 31, 2020 includes foreign currency denominated debt, which was translated into U.S. dollars using the relevant exchange rates as of June 30, 2020 and March 31, 2020, as applicable. Additionally, the amounts in this section that are presented in “C$” (Canadian dollar), “€” (Euro) and “£” (Sterling) were converted into U.S. dollars solely for the convenience based on the exchange rate on June 30, 2020 of 1.3576, 1.1234 and 1.2387, 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
  June 30, 2020 March 31, 2020 June 30, 2020 March 31, 2020
         
  (U.S. dollars in millions)    
United States Segment        
Unsecured debt:        
Commercial paper $4,290
 $4,486
 1.15% 1.83%
Bank loans 3,797
 3,797
 1.27% 2.21%
Private MTN program 999
 999
 3.84% 3.84%
Public MTN program 25,023
 25,130
 1.87% 2.07%
Euro MTN programme 28
 28
 2.23% 2.23%
Total unsecured debt 34,137
 34,440
    
Secured debt 8,713
 8,710
 2.06% 2.26%
Total debt $42,850
 $43,150
    
         
Canada Segment        
Unsecured debt:        
Commercial paper $744
 $1,004
 1.44% 1.73%
Related party debt 368
 533
 0.93% 1.76%
Bank loans 1,491
 1,141
 1.21% 2.01%
Other debt 3,236
 3,266
 2.27% 2.47%
Total unsecured debt 5,839
 5,944
    
Secured debt 990
 1,038
 1.05% 2.13%
Total debt $6,829
 $6,982
    
         
Consolidated        
Unsecured debt:        
Commercial paper $5,034
 $5,490
 1.19% 1.81%
Related party debt 368
 533
 0.93% 1.76%
Bank loans 5,288
 4,938
 1.24% 2.16%
Private MTN program 999
 999
 3.84% 3.84%
Public MTN program 25,023
 25,130
 1.87% 2.07%
Euro MTN programme 28
 28
 2.23% 2.23%
Other debt 3,236
 3,266
 2.27% 2.47%
Total unsecured debt 39,976
 40,384
    
Secured debt 9,703
 9,748
 1.95% 2.25%
Total debt $49,679
 $50,132
    

44



Commercial Paper
As of June 30, 2020, we had commercial paper programs in the United States of $7.0 billion and in Canada of C$2.5 billion ($1.8 billion). Interest rates on the commercial paper are fixed at the time of issuance. During the three months ended June 30, 2020, consolidated commercial paper month-end outstanding principal balances ranged from $3.7 billion to $5.0 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 three months ended June 30, 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 ($442 million). As of June 30, 2020, we had bank loans denominated in U.S. dollars and Canadian dollars with floating and fixed interest rates, in principal amounts ranging from $37 million to $600 million. As of June 30, 2020, the remaining maturities of all bank loans outstanding ranged from 66 days to approximately 4.7 years. The weighted average remaining maturity on all bank loans was 1.7 years as of June 30, 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 June 30, 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 June 30, 2020, the remaining maturities of Private MTNs outstanding did not exceed 1.2 years. Private MTNs were 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 June 30, 2020, management believes that AHFC was in compliance with all covenants contained in the Private MTNs.
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 three months ended June 30, 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. The weighted average remaining maturities of all Public MTNs was 2.3 years as of June 30, 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 June 30, 2020, management believes that AHFC was in compliance with all covenants under the indenture.

45



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 June 30, 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:
 
  June 30, 2020 March 31, 2020
     
  (U.S. dollars in millions)
U.S. dollar $20,463
 $22,309
Euro 4,817
 3,076
Sterling 742
 744
Japanese yen 28
 28
Total $26,050
 $26,157
Other Debt
HCFI issues privately placed Canadian dollar denominated notes, with either fixed or floating interest rates. During the three months ended June 30, 2020, HCFI did not enter into any private placement transactions. As of June 30, 2020, the remaining maturities of all of HCFI’s Canadian notes outstanding ranged from 59 days to approximately 4.9 years. The weighted average remaining maturities of these notes was 2.4 years as of June 30, 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 June 30, 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
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.
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

46



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 three months ended June 30, 2020, we issued notes through asset-backed securitizations totaling $1.3 billion, which were secured by assets with an initial balance of $1.3 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 June 30, 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 billion) credit agreement which provides that HCFI may borrow up to C$1.0 billion ($737 million) on a one-year revolving basis and up to C$1.0 billion ($737 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 June 30, 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 June 30, 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 June 30, 2020, no amounts were drawn upon under these agreements. These agreements expire in September 2020. 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;

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


47



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 June 30, 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 $17 million during both the three months ended June 30, 2020 and 2019, pursuant to these Support Compensation Agreements.
Indebtedness of Consolidated Subsidiaries
As of June 30, 2020, AHFC and its consolidated subsidiaries had $59.6 billion of outstanding indebtedness and other liabilities, including current liabilities, of which $17.1 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.

48



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 June 30,
  Total 2021 2022 2023 2024 2025 Thereafter
               
  (U.S. dollars in millions)
Unsecured debt obligations (1)
 $40,044
 $14,360
 $9,953
 $7,081
 $4,435
 $2,715
 $1,500
Secured debt obligations (1)
 9,717
 5,083
 2,937
 1,479
 218
 
 
Interest payments on debt (2)
 1,921
 741
 486
 322
 192
 87
 93
Operating lease obligations 59
 11
 9
 8
 8
 7
 16
Total $51,741
 $20,195
 $13,385
 $8,890
 $4,853
 $2,809
 $1,609
_______________________

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

49



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 and external credit scores 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, used vehicle prices, and consumer debt service burdens 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 June 30, 2020 of $43 million and $85 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 June 30, 2020 of $23 million and $46 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.

50



Sensitivity Analysis
If future estimated auction values for all outstanding operating leases as of June 30, 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 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 June 30, 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 June 30, 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 June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


51



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.
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.

52



Item 6. Exhibits
   
Exhibit
Number
 Description
   
 
3.1(1)
 
 
 
3.2(1)
 
 
 
4.1(1)
 
 
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)
 
 
 
4.4
 
 
 
4.5(5)
 
 
4.6(6)
 
 
4.7
 
 
31.1(9)
 
 
 
31.2(9)
 
 
 
32.1(10)
 
 
 
32.2(10)
 
 
   
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.


53



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: August 10, 2020
 
     
AMERICAN HONDA FINANCE CORPORATION 
   
By:/s/ Paul C. Honda 
 Paul C. Honda 
 
Vice President and Assistant Secretary
(Principal Accounting Officer)
 


54