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EX-32.2 - EXHIBIT 32.2 - AMERICAN HONDA FINANCE CORPahfc-ex322q32019.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN HONDA FINANCE CORPahfc-ex321q32019.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN HONDA FINANCE CORPahfc-ex312q32019.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN HONDA FINANCE CORPahfc-ex311q32019.htm


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 December 31, 2019
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)
  
 
 
California
95-3472715
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
20800 Madrona Avenue, Torrance, California
90503
(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 class
Trading symbol(s)
Name of exchange on which registered
1.300% Medium-Term Notes, Series A
Due March 21, 2022
N/A
New York Stock Exchange
2.625% Medium-Term Notes, Series A
Due October 14, 2022
N/A
New York Stock Exchange
1.375% Medium-Term Notes, Series A
Due November 10, 2022
N/A
New York Stock Exchange
0.550% Medium-Term Notes, Series A
Due March 17, 2023
N/A
New York Stock Exchange
0.750% Medium-Term Notes, Series A
Due January 17, 2024
N/A
New York Stock Exchange
0.350% Medium-Term Notes, Series A
Due August 26, 2022
N/A
New York Stock Exchange

 
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 January 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 December 31, 2019
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:
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 is contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the Securities and Exchange Commission on June 21, 2019. 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)

 
 
December 31,
2019
 
March 31,
2019
Assets
 
 
 
 
Cash and cash equivalents
 
$
837

 
$
795

Finance receivables, net
 
40,495

 
40,424

Investment in operating leases, net
 
34,436

 
32,606

Due from Parent and affiliated companies
 
125

 
162

Income taxes receivable
 
336

 
228

Other assets
 
1,302

 
1,369

Derivative instruments
 
399

 
380

Total assets
 
$
77,930

 
$
75,964

Liabilities and Equity
 
 
 
 
Debt
 
$
50,640

 
$
49,754

Due to Parent and affiliated companies
 
104

 
106

Income taxes payable
 
285

 
152

Deferred income taxes
 
6,681

 
6,399

Other liabilities
 
1,765

 
1,717

Derivative instruments
 
441

 
568

Total liabilities
 
59,916

 
58,696

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 December 31, 2019 and March 31, 2019
 
1,366

 
1,366

Retained earnings
 
15,691

 
15,088

Accumulated other comprehensive loss
 
(89
)
 
(118
)
Total shareholder’s equity
 
16,968

 
16,336

Noncontrolling interest in subsidiary
 
1,046

 
932

Total equity
 
18,014

 
17,268

Total liabilities and equity
 
$
77,930

 
$
75,964

 
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.
 
 
 
December 31,
2019
 
March 31,
2019
Finance receivables, net
 
$
9,436

 
$
9,073

Investment in operating leases, net
 
558

 

Other assets
 
616

 
600

Total assets
 
$
10,610

 
$
9,673

Secured debt
 
$
9,608

 
$
8,790

Other liabilities
 
10

 
8

Total liabilities
 
$
9,618

 
$
8,798


 See accompanying Notes to Consolidated Financial Statements.


1



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Three months ended
December 31,
 
Nine months ended
December 31,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Retail
 
$
438

 
$
415

 
$
1,314

 
$
1,192

Dealer
 
52

 
59

 
174

 
169

Operating leases
 
1,952

 
1,826

 
5,782

 
5,391

Total revenues
 
2,442

 
2,300

 
7,270

 
6,752

Leased vehicle expenses
 
1,463

 
1,352

 
4,264

 
3,994

Interest expense
 
307

 
303

 
947

 
870

Net revenues
 
672

 
645

 
2,059

 
1,888

Other income, net
 
24

 
19

 
67

 
51

Total net revenues
 
696

 
664

 
2,126

 
1,939

Expenses:
 
 
 
 
 
 
 
 
General and administrative expenses
 
124

 
109

 
369

 
338

Provision for credit losses
 
65

 
75

 
171

 
181

Early termination loss on operating leases
 
37

 
22

 
97

 
78

(Gain)/Loss on derivative instruments
 
(76
)
 
106

 
129

 
416

(Gain)/Loss on foreign currency revaluation of debt
 
145

 
(63
)
 
(1
)
 
(337
)
Total expenses
 
295

 
249

 
765

 
676

Income before income taxes
 
401

 
415

 
1,361

 
1,263

Income tax expense
 
106

 
67

 
379

 
320

Net income
 
295

 
348

 
982

 
943

Less: Net income attributable to noncontrolling interest
 
27

 
22

 
87

 
74

Net income attributable to
American Honda Finance Corporation
 
$
268

 
$
326

 
$
895

 
$
869

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Three months ended
December 31,
 
Nine months ended
December 31,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
295

 
$
348

 
$
982

 
$
943

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
41

 
(103
)
 
56

 
(103
)
Comprehensive income
 
336

 
245

 
1,038

 
840

Less: Comprehensive income/(loss) attributable to noncontrolling interest
 
47

 
(27
)
 
114

 
25

Comprehensive income attributable to
American Honda Finance Corporation
 
$
289

 
$
272

 
$
924

 
$
815

  
See accompanying Notes to Consolidated Financial Statements.



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, 2018
 
$
16,596

 
$
14,449

 
$
(85
)
 
$
1,366

 
$
866

Net income
 
943

 
869

 

 

 
74

Other comprehensive loss
 
(103
)
 

 
(54
)
 

 
(49
)
Dividends declared
 
(235
)
 
(235
)
 

 

 

Balance at December 31, 2018
 
$
17,201

 
$
15,083

 
$
(139
)
 
$
1,366

 
$
891

 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
$
17,268

 
$
15,088

 
$
(118
)
 
$
1,366

 
$
932

Net income
 
982

 
895

 

 

 
87

Other comprehensive income
 
56

 

 
29

 

 
27

Dividends declared
 
(292
)
 
(292
)
 

 

 

Balance at December 31, 2019
 
$
18,014

 
$
15,691

 
$
(89
)
 
$
1,366

 
$
1,046

 
See accompanying Notes to Consolidated Financial Statements.


3




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Nine months ended
December 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
982

 
$
943

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Debt and derivative instrument valuation adjustments
 
60

 
81

Provision for credit losses
 
171

 
181

Early termination loss on operating leases
 
97

 
78

Depreciation on leased vehicles
 
4,275

 
4,112

Accretion of unearned subsidy income
 
(1,255
)
 
(1,210
)
Amortization of deferred dealer participation and other deferred costs
 
272

 
252

Gain on disposition of leased vehicles
 
(113
)
 
(118
)
Deferred income taxes
 
273

 
214

Changes in operating assets and liabilities:
 
 
 
 
Income taxes receivable/payable
 
25

 
35

Other assets
 
60

 
(31
)
Accrued interest/discounts on debt
 
37

 
51

Other liabilities
 
(31
)
 
61

Due to/from Parent and affiliated companies
 
35

 
16

Net cash provided by operating activities
 
4,888

 
4,665

Cash flows from investing activities:
 
 
 
 
Finance receivables acquired
 
(13,678
)
 
(14,368
)
Principal collected on finance receivables
 
13,024

 
12,007

Net change in wholesale loans
 
556

 
150

Purchase of operating lease vehicles
 
(14,020
)
 
(11,966
)
Disposal of operating lease vehicles
 
8,184

 
6,991

Cash received for unearned subsidy income
 
913

 
1,490

Other investing activities, net
 
(4
)
 
(4
)
Net cash used in investing activities
 
(5,025
)
 
(5,700
)
 
Statement continues on the next page.

4




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Nine months ended
December 31,
 
 
2019
 
2018
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of commercial paper
 
$
24,449

 
$
23,289

Paydown of commercial paper
 
(24,361
)
 
(22,254
)
Proceeds from issuance of short-term debt
 
300

 
1,100

Paydown of short-term debt
 
(1,100
)
 
(300
)
Proceeds from issuance of related party debt
 
2,337

 
2,984

Paydown of related party debt
 
(2,526
)
 
(3,293
)
Proceeds from issuance of medium term notes and other debt
 
5,911

 
5,365

Paydown of medium term notes and other debt
 
(5,303
)
 
(5,492
)
Proceeds from issuance of secured debt
 
4,692

 
3,514

Paydown of secured debt
 
(3,916
)
 
(3,493
)
Dividends paid
 
(292
)
 
(235
)
Net cash provided by financing activities
 
191

 
1,185

Effect of exchange rate changes on cash and cash equivalents
 
2

 
(8
)
Net increase in cash and cash equivalents
 
56

 
142

Cash and cash equivalents and restricted cash at beginning of period
 
1,383

 
1,226

Cash and cash equivalents and restricted cash at end of period
 
$
1,439

 
$
1,368

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
689

 
$
594

Income taxes paid
 
$
61

 
$
39

 
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.
 
 
December 31,
 
 
2019
 
2018
Cash and cash equivalents
 
$
837

 
$
811

Restricted cash included in other assets (1)
 
602

 
557

Total
 
$
1,439

 
$
1,368

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

See accompanying Notes to Consolidated Financial Statements.



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, 2019 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on June 21, 2019. All significant intercompany balances and transactions have been eliminated upon consolidation.
Certain reclassifications have been made to prior period financial statements and notes to conform to the current period presentation.

Recently Adopted Accounting Standards
Effective April 1, 2019, the Company adopted Accounting Standard Update (ASU) 2016-02, Leases (Topic 842), and the related amendments using the modified retrospective approach. Prior period comparative information has not been restated and will continue to be reported under previous accounting policies. The Company also elected the package of practical expedients which allows the Company to not reassess prior conclusions about lease identification, classification, and initial direct costs. The adoption of the new lease standard did not have a cumulative-effect adjustment to the opening balance of retained earnings.
Upon adoption, the Company recognized right-of-use assets of $56 million, lease liabilities of $62 million, and a reduction in other liabilities of $6 million for accrued rent and unamortized tenant improvement allowances for existing operating leases as a lessee. The new lease standard is not expected to have a significant impact on the Company’s net income on an ongoing basis.
Lessor accounting remains largely unchanged except for limited amendments impacting the Company’s income statement classification of the following: (i) the Company has elected to record the general allowance for uncollectible operating lease receivables through a reduction to revenue rather than a provision for credit loss, (ii) lessor costs, such as property taxes, paid directly to third parties and reimbursed by lessee which were presented net are now recognized gross as revenue and expense, and (iii) the amortization of initial direct costs which was previously recognized as a reduction of lease revenue is now presented as an expense. The Company has elected to exclude from lease revenue and expenses, sales taxes and other similar taxes collected from lessees on behalf of governmental agencies, which is consistent with previous accounting policies.
Effective April 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The adoption of this standard did not impact the Company’s consolidated financial statements since there were no designated hedge accounting relationships.


6



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


Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses. The Company is finalizing accounting policy elections and refining its models and methodologies used to estimate the allowance for credit losses to meet the requirements of the new standard. The Company will adopt the new standard and the related amendments effective April 1, 2020, with a cumulative-effect adjustment to opening retained earnings, net of tax, in the period of adoption. The Company's allowance for credit losses is expected to increase upon adoption of this standard. The magnitude of the increase will depend on the composition and seasoning of the loan portfolio, existing and forecasted economic conditions, and other management judgments at the date of adoption. Based on the portfolio balances and forecasted economic conditions as of December 31, 2019, the total allowance for credit losses is expected to increase by approximately 60%, primarily for retail loans.
In August 2018, the FASB issued 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 is not expected to have an impact on the consolidated financial statements. The Company will adopt the new guidance effective April 1, 2020.
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.
 

7



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



(2) Finance Receivables
Finance receivables consisted of the following:
 
 
 
December 31, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Finance receivables
 
$
35,924

 
$
5,169

 
$
41,093

Allowance for credit losses
 
(199
)
 

 
(199
)
Deferred dealer participation and other deferred costs
 
451

 

 
451

Unearned subsidy income
 
(850
)
 

 
(850
)
Finance receivables, net
 
$
35,326

 
$
5,169

 
$
40,495

 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Finance receivables
 
$
35,457

 
$
5,835

 
$
41,292

Allowance for credit losses
 
(193
)
 
(8
)
 
(201
)
Deferred dealer participation and other deferred costs
 
431

 

 
431

Unearned subsidy income
 
(1,098
)
 

 
(1,098
)
Finance receivables, net
 
$
34,597

 
$
5,827

 
$
40,424

 
Finance receivables include retail loans with a net carrying amount of $9.4 billion and $9.1 billion as of December 31, 2019 and March 31, 2019, respectively, which have been transferred to bankruptcy-remote special purpose entities (SPEs) and are considered to be legally isolated but do not qualify for sale accounting treatment. These retail loans are restricted as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.
Credit Quality of Finance Receivables
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. Credit risk on 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. 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. Exposure to credit risk is managed through regular monitoring and adjusting of underwriting standards, pricing of contracts for expected losses, focusing collection efforts to minimize losses, and ongoing reviews of the financial condition of dealers.
Allowance for Credit Losses
The allowance for credit losses is management’s estimate of probable losses incurred on finance receivables, which requires significant judgment and assumptions that are inherently uncertain. The allowance is based on management’s evaluation of many factors, including the Company’s historical credit loss experience, the value of the underlying collateral, delinquency trends, and economic conditions.
Consumer finance receivables in the retail loan segment are collectively evaluated for impairment. Delinquencies and losses are monitored on an ongoing basis and the Company's historical experience provides the primary basis for estimating the allowance. Management utilizes various methodologies when estimating the allowance for credit losses, including models which incorporate vintage loss and delinquency migration analysis. These models take into consideration attributes of the portfolio including loan-to-value ratios, internal and external credit scores, collateral types, and loan terms. Market and economic factors such as used vehicle prices, unemployment, and consumer debt service burdens are also incorporated into these models.

8



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


Dealer loans are individually evaluated for impairment when 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. Dealer loans that have not been specifically identified as impaired are collectively evaluated for impairment.
There were no modifications to the terms of dealer loan contracts that constituted troubled debt restructurings during the nine months ended December 31, 2019 and 2018.
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 nine months ended December 31, 2019 and 2018. The Company does allow payment deferrals on consumer finance receivables. However, 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.

9



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


The following is a summary of the activity in the allowance for credit losses of finance receivables:
 
 
 
Three and nine months ended December 31, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, October 1, 2019
 
$
197

 
$

 
$
197

Provision
 
65

 

 
65

Charge-offs
 
(86
)
 

 
(86
)
Recoveries
 
23

 

 
23

Effect of translation adjustment
 

 

 

Ending balance, December 31, 2019
 
$
199

 
$

 
$
199

 
 
 
 
 
 
 
Beginning balance, April 1, 2019
 
$
193

 
$
8

 
$
201

Provision
 
162

 
9

 
171

Charge-offs
 
(230
)
 
(17
)
 
(247
)
Recoveries
 
74

 

 
74

Effect of translation adjustment
 

 

 

Ending balance, December 31, 2019
 
$
199

 
$

 
$
199

 
 
 
 
 
 
 
Allowance for credit losses – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
199

 

 
199

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
4

 
$
4

Collectively evaluated for impairment
 
35,525

 
5,165

 
40,690

 
 
 
 
 
 
 
 
 
Three and nine months ended December 31, 2018
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, October 1, 2018
 
$
191

 
$

 
$
191

Provision
 
56

 
8

 
64

Charge-offs
 
(80
)
 

 
(80
)
Recoveries
 
21

 

 
21

Effect of translation adjustment
 

 

 

Ending balance, December 31, 2018
 
$
188

 
$
8

 
$
196

 
 
 
 
 
 
 
Beginning balance, April 1, 2018
 
$
179

 
$

 
$
179

Provision
 
143

 
7

 
150

Charge-offs
 
(200
)
 

 
(200
)
Recoveries
 
66

 
1

 
67

Effect of translation adjustment
 

 

 

Ending balance, December 31, 2018
 
$
188

 
$
8

 
$
196

 
 
 
 
 
 
 
Allowance for credit losses – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
8

 
$
8

Collectively evaluated for impairment
 
188

 

 
188

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
178

 
$
178

Collectively evaluated for impairment
 
34,252

 
5,273

 
39,525

 



10



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


Delinquencies
The following is an aging analysis of past due finance receivables:
 
 
 
30 – 59 days
past due
 
60 – 89 days
past due
 
90 days
or greater
past due
 
Total
past due
 
Current or
less than 30
days past due
 
Total
finance
receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
New auto
 
$
284

 
$
71

 
$
19

 
$
374

 
$
28,635

 
$
29,009

Used and certified auto
 
106

 
27

 
6

 
139

 
5,100

 
5,239

Motorcycle and other
 
16

 
6

 
4

 
26

 
1,251

 
1,277

Total retail
 
406

 
104

 
29

 
539

 
34,986

 
35,525

Dealer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale flooring
 
1

 

 

 
1

 
4,128

 
4,129

Commercial loans
 

 

 

 

 
1,040

 
1,040

Total dealer loans
 
1

 

 

 
1

 
5,168

 
5,169

Total finance receivables
 
$
407

 
$
104

 
$
29

 
$
540

 
$
40,154

 
$
40,694

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
New auto
 
$
214

 
$
41

 
$
10

 
$
265

 
$
28,521

 
$
28,786

Used and certified auto
 
70

 
14

 
4

 
88

 
4,712

 
4,800

Motorcycle and other
 
12

 
3

 
2

 
17

 
1,187

 
1,204

Total retail
 
296

 
58

 
16

 
370

 
34,420

 
34,790

Dealer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale flooring
 
1

 

 
17

 
18

 
4,668

 
4,686

Commercial loans
 
51

 

 
17

 
68

 
1,081

 
1,149

Total dealer loans
 
52

 

 
34

 
86

 
5,749

 
5,835

Total finance receivables
 
$
348

 
$
58

 
$
50

 
$
456

 
$
40,169

 
$
40,625

 
Credit Quality Indicators
Retail Loan Segment
The Company utilizes proprietary credit scoring systems to evaluate the credit risk of applicants for retail loans. These systems assign internal credit scores based on various factors, including the applicant’s credit bureau information and contract terms. The internal credit score provides the primary basis for credit decisions when acquiring retail loan contracts. Internal credit scores are determined only at the time of origination and are not reassessed during the life of the contract.
Subsequent to origination, collection experience provides an indication of the credit quality of consumer finance receivables. The likelihood of accounts charging off is significantly higher once an account becomes 60 days delinquent. Accounts that are current or less than 60 days past due are considered to be performing. Accounts that are 60 days or more past due are considered to be nonperforming. The table below presents the Company’s portfolio of retail loans by this credit quality indicator:
 

11



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


 
 
Retail
new auto
loans
 
Retail
used and
certified auto
loans
 
Retail
motorcycle
and other
loans
 
Total consumer
finance
receivables
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
December 31, 2019
 
 
 
 
 
 
 
 
Performing
 
$
28,919

 
$
5,206

 
$
1,267

 
$
35,392

Nonperforming
 
90

 
33

 
10

 
133

Total
 
$
29,009

 
$
5,239

 
$
1,277

 
$
35,525

 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
Performing
 
$
28,735

 
$
4,782

 
$
1,199

 
$
34,716

Nonperforming
 
51

 
18

 
5

 
74

Total
 
$
28,786

 
$
4,800

 
$
1,204

 
$
34,790

 
Dealer Loan Portfolio 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.
The Company’s outstanding portfolio of dealer loans has been divided into two groups in the table below. Group A includes the loans of dealerships with the strongest internal risk rating. Group B includes the loans of all remaining dealers.
 
 
 
December 31, 2019
 
March 31, 2019
 
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Group A
 
$
2,631

 
$
784

 
$
3,415

 
$
3,121

 
$
823

 
$
3,944

Group B
 
1,498

 
256

 
1,754

 
1,565

 
326

 
1,891

Total
 
$
4,129

 
$
1,040

 
$
5,169

 
$
4,686

 
$
1,149

 
$
5,835




12



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:
 
 
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Operating lease vehicles
 
$
44,113

 
$
42,427

Accumulated depreciation
 
(8,206
)
 
(8,262
)
Deferred dealer participation and initial direct costs
 
133

 
119

Unearned subsidy income
 
(1,484
)
 
(1,563
)
Estimated early termination losses
 
(120
)
 
(115
)
Investment in operating leases, net
 
$
34,436

 
$
32,606

 
Operating lease revenue consisted of the following:
 
 
Three months ended
December 31,
 
Nine months ended
December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Lease payments
 
$
1,697

 
$
1,607

 
$
5,003

 
$
4,760

Subsidy income and dealer rate participation, net (1)
 
241

 
219

 
732

 
631

Reimbursed lessor costs (2)
 
14

 

 
47

 

Total operating lease revenue, net
 
$
1,952

 
$
1,826

 
$
5,782

 
$
5,391


(1)
Includes amortization of initial direct costs during the three and nine months ended December 31, 2018.
(2)
Reimbursed lessor costs were presented net during the three and nine months ended December 31, 2018.

Leased vehicle expenses consisted of the following:
 
 
Three months ended
December 31,
 
Nine months ended
December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Depreciation expense
 
$
1,448

 
$
1,376

 
$
4,275

 
$
4,112

Initial direct costs and other lessor costs (1)
 
32

 

 
102

 

Gain on disposition of leased vehicles (2)
 
(17
)
 
(24
)
 
(113
)
 
(118
)
Total leased vehicle expenses, net
 
$
1,463

 
$
1,352

 
$
4,264

 
$
3,994


(1)
Amortization of initial direct costs was presented as a reduction to lease revenue and reimbursed lessor costs were presented net during the three and nine months ended December 31, 2018.
(2)
Included in the gain on disposition of leased vehicles are end of term charges of $12 million for both the three months ended December 31, 2019 and 2018, and $58 million and $52 million for the nine months ended December 31, 2019 and 2018, respectively.
Investment in operating leases includes lease assets with a net carrying amount of $558 million as of December 31, 2019, 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.


13



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


Contractual operating lease payments due as of December 31, 2019 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 December 31,
 
(U.S. dollars in millions)

 
 
 
2020
 
$
5,935

2021
 
4,143

2022
 
1,684

2023
 
292

2024
 
65

Total
 
$
12,119


The Company recognized early termination losses due to lessee defaults of $37 million and $22 million during the three months ended December 31, 2019 and 2018, respectively, and $97 million and $78 million, during the nine months ended December 31, 2019 and 2018, respectively. Actual net losses realized totaled $37 million and $26 million for the three months ended December 31, 2019 and 2018, respectively, and $93 million and $62 million for the nine months ended December 31, 2019 and 2018, respectively.
The general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $9 million and $22 million during the three and nine months ended December 31, 2019, respectively. The general allowance for uncollectible operating lease receivables was recorded through a provision for credit losses of $11 million and $31 million during the three and nine months ended December 31, 2018, respectively.
No impairment losses due to declines in estimated residual values were recognized during the three and nine months ended December 31, 2019 and 2018.

14



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

 
December 31,
2019
 
March 31,
2019
 
December 31,
2019
 
March 31,
2019
 
December 31,
2019
 
March 31,
2019

 
 
 
 
 
 
 
 
 

 

 
 
(U.S. dollars in millions)
 
 
 
 
 
 
 
 
Unsecured debt:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
 
$
5,865

 
$
5,755

 
1.84
%
 
2.60
%
 
1.70 - 2.07%
 
1.79 - 2.71%
Related party debt
 
577

 
749

 
1.99
%
 
2.18
%
 
1.97 - 2.06%
 
2.02 - 2.31%
Bank loans
 
4,394

 
4,962

 
2.62
%
 
3.16
%
 
2.28 - 2.85%
 
2.35 - 3.50%
Private MTN program
 
999

 
999

 
3.84
%
 
3.84
%
 
3.80 - 3.88%
 
3.80 - 3.88%
Public MTN program
 
25,634

 
24,117

 
2.20
%
 
2.35
%
 
0.35 - 3.63%
 
0.35 - 3.63%
Euro MTN programme
 
28

 
868

 
2.23
%
 
1.89
%
 
2.23 - 2.23%
 
1.88 - 2.23%
Other debt
 
3,535

 
3,514

 
2.55
%
 
2.50
%
 
1.82 - 3.44%
 
1.63 - 3.44%
Total unsecured debt
 
41,032

 
40,964

 
 
 
 
 

 

Secured debt
 
9,608

 
8,790

 
2.39
%
 
2.42
%
 
1.21 - 3.30%
 
1.16 - 3.30%
Total debt
 
$
50,640

 
$
49,754

 
 
 
 
 

 

 
As of December 31, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $12.4 billion, long-term debt with fixed interest rates totaled $31.0 billion, and short-term debt totaled $7.4 billion. As of March 31, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $12.5 billion, long-term debt with fixed interest rates totaled $29.2 billion, and short-term debt totaled $8.1 billion.
Commercial Paper
As of December 31, 2019 and March 31, 2019, the Company had commercial paper programs that provide the Company with available funds of up to $8.5 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 $5.6 billion and $5.5 billion during the nine months ended December 31, 2019 and 2018, respectively. The maximum balance outstanding at any month-end during both the nine months ended December 31, 2019 and 2018 was $6.2 billion.
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 $3 million and $4 million for the three months ended December 31, 2019 and 2018, respectively, and $11 million and $12 million for the nine months ended December 31, 2019 and 2018, respectively.

Bank Loans
Outstanding bank loans at December 31, 2019 were either short-term or long-term, with floating interest rates, and denominated in U.S. dollars or Canadian dollars. Outstanding bank loans have prepayment options. No outstanding bank loans as of December 31, 2019 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 December 31, 2019 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.

15



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 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 December 31, 2019 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 December 31, 2019. 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 December 31, 2019 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 December 31, 2019 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 28, 2020, a $2.1 billion credit agreement, which expires on March 3, 2021, and a $1.4 billion credit agreement, which expires on March 3, 2023. As of December 31, 2019, 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 $1.2 billion syndicated bank credit facility which provides that HCFI may borrow up to $616 million on a one-year revolving basis and up to $616 million on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 2020 and the five-year tranche of the credit agreement expires on March 25, 2024. As of December 31, 2019, 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 December 31, 2019, 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. 

16



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.
 
 
 
December 31, 2019
 
March 31, 2019
 
 
Notional
balances
 
Assets
 
Liabilities
 
Notional
balances
 
Assets
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
59,380

 
$
303

 
$
343

 
$
58,132

 
$
308

 
$
307

Cross currency swaps
 
4,001

 
96

 
98

 
5,002

 
72

 
261

Gross derivative assets/liabilities
 
 
 
399

 
441

 
 
 
380

 
568

Counterparty netting adjustment
     and collateral
 
 
 
(324
)
 
(318
)
 
 
 
(313
)
 
(318
)
Net derivative assets/liabilities
 
 
 
$
75

 
$
123

 
 
 
$
67

 
$
250

 
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
December 31,
 
Nine months ended
December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
(17
)
 
$
(25
)
 
$
(62
)
 
$
(5
)
Cross currency swaps
 
93

 
(81
)
 
(67
)
 
(411
)
Total gain/(loss) on derivative instruments
 
$
76

 
$
(106
)
 
$
(129
)
 
$
(416
)
 
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 credit support agreements that require posting of cash collateral to mitigate counterparty credit risk on derivative positions.

17



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
December 31,
 
Nine months ended
December 31,
Income Statement
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Revenue:
 
 
 
 
 
 
 
 
Subsidy income
 
$
404

 
$
414

 
$
1,249

 
$
1,204

Interest expense:
 
 
 
 
 
 
 
 
Related party debt
 
3

 
4

 
11

 
12

Other income, net:
 
 
 
 
 
 
 
 
VSC administration fees
 
27

 
28

 
82

 
82

Support Service Fee
 
(9
)
 
(9
)
 
(27
)
 
(26
)
General and administrative expenses:
 
 
 
 
 
 
 
 
Support Compensation Agreement fees
 
17

 
6

 
51

 
17

Benefit plan expenses
 
2

 
3

 
7

 
8

Shared services
 
17

 
13

 
52

 
50


Balance Sheet
 
December 31,
2019
 
March 31,
2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Assets:
 
 
 
 
Finance receivables, net:
 
 
 
 
Unearned subsidy income
 
$
(842
)
 
$
(1,091
)
Investment in operating leases, net:
 
 
 
 
Unearned subsidy income
 
(1,481
)
 
(1,559
)
Due from Parent and affiliated companies
 
125

 
162

Liabilities:
 
 
 
 
Debt:
 
 
 
 
Related party debt
 
$
577

 
$
749

Due to Parent and affiliated companies
 
104

 
106

Accrued interest expense:
 
 
 
 
Related party debt
 
2

 
3

Other liabilities:
 
 
 
 
VSC unearned administrative fees
 
372

 
387

Accrued benefit expenses
 
67

 
65