Company Quick10K Filing
American Honda Finance
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 14 $-0
10-Q 2019-11-12 Quarter: 2019-09-30
10-Q 2019-08-08 Quarter: 2019-06-30
10-K 2019-06-21 Annual: 2019-03-31
10-Q 2019-02-07 Quarter: 2018-12-31
10-Q 2018-11-08 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-K 2018-06-21 Annual: 2018-03-31
10-Q 2018-02-08 Quarter: 2017-12-31
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-10 Quarter: 2017-06-30
10-K 2017-06-22 Annual: 2017-03-31
10-Q 2017-02-10 Quarter: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-10 Quarter: 2016-06-30
10-K 2016-06-23 Annual: 2016-03-31
10-Q 2016-02-10 Quarter: 2015-12-31
10-Q 2015-11-10 Quarter: 2015-09-30
10-Q 2015-08-10 Quarter: 2015-06-30
10-K 2015-06-26 Annual: 2015-03-31
10-Q 2015-02-12 Quarter: 2014-12-31
10-Q 2014-11-13 Quarter: 2014-09-30
10-Q 2014-08-11 Quarter: 2014-06-30
10-K 2014-06-20 Annual: 2014-03-31
10-Q 2014-02-12 Quarter: 2013-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
8-K 2019-08-08 Other Events, Exhibits
8-K 2019-03-12 Other Events
8-K 2019-03-01 Other Events
8-K 2018-03-23 Other Events
8-K 2018-03-02 Other Events
8-K 2018-02-09 Code of Ethics
AHFC 2019-09-30
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ahfc-ex311q22019.htm
EX-31.2 ahfc-ex312q22019.htm
EX-32.1 ahfc-ex321q22019.htm
EX-32.2 ahfc-ex322q22019.htm

American Honda Finance Earnings 2019-09-30

AHFC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CNHC 12,949 11,626 877 0 149 771 5,714 0% 7.4 1%
RMES 1 1 0 0 -0 -0 -0 0.5 -13%
TCT 210 12 13 0 11 11 -200 0% -18.3 5%
VDI 1,766 1,288 779 0 465 632 222 0% 0.4 26%
POYE 0 0 0 0 -0 -0 -0 0.0 -1,973%
SCTF 0 0 0 0 -0 -0 -0 3.0 -33%
SEK 302,033 283,794 0 0 0 0 -0 0%
DAVEY 570 398 1,095 98 32 97 161 9% 1.7 6%
SLDV 25 6 2 0 13 19 -1 0% -0.0 53%
MBCC 216 243 112 0 -7 10 215 0% 21.5 -3%

10-Q 1 ahfc-93019q210q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2019, the number of outstanding shares of common stock of the registrant was 13,660,000 all of which shares were held by American Honda Motor Co., Inc. None of the shares are publicly traded.

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


 





AMERICAN HONDA FINANCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 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)

 
 
September 30,
2019
 
March 31,
2019
Assets
 
 
 
 
Cash and cash equivalents
 
$
808

 
$
795

Finance receivables, net
 
40,223

 
40,424

Investment in operating leases, net
 
33,770

 
32,606

Due from Parent and affiliated companies
 
126

 
162

Income taxes receivable
 
319

 
228

Vehicles held for disposition
 
196

 
252

Other assets
 
1,148

 
1,117

Derivative instruments
 
390

 
380

Total assets
 
$
76,980

 
$
75,964

Liabilities and Equity
 
 
 
 
Debt
 
$
50,008

 
$
49,754

Due to Parent and affiliated companies
 
119

 
106

Accrued interest expense
 
161

 
150

Income taxes payable
 
248

 
152

Deferred income taxes
 
6,599

 
6,399

Other liabilities
 
1,602

 
1,567

Derivative instruments
 
565

 
568

Total liabilities
 
59,302

 
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 September 30, 2019 and March 31, 2019
 
1,366

 
1,366

Retained earnings
 
15,423

 
15,088

Accumulated other comprehensive loss
 
(110
)
 
(118
)
Total shareholder’s equity
 
16,679

 
16,336

Noncontrolling interest in subsidiary
 
999

 
932

Total equity
 
17,678

 
17,268

Total liabilities and equity
 
$
76,980

 
$
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.
 
 
 
September 30,
2019
 
March 31,
2019
Finance receivables, net
 
$
9,206

 
$
9,073

Vehicles held for disposition
 
4

 
3

Other assets
 
616

 
597

Total assets
 
$
9,826

 
$
9,673

Secured debt
 
$
8,934

 
$
8,790

Accrued interest expense
 
8

 
8

Total liabilities
 
$
8,942

 
$
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
September 30,
 
Six months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Retail
 
$
443

 
$
401

 
$
876

 
$
777

Dealer
 
57

 
55

 
122

 
110

Operating leases
 
1,935

 
1,796

 
3,830

 
3,565

Total revenues
 
2,435

 
2,252

 
4,828

 
4,452

Leased vehicle expenses
 
1,409

 
1,314

 
2,801

 
2,642

Interest expense
 
318

 
293

 
640

 
567

Net revenues
 
708

 
645

 
1,387

 
1,243

Other income, net
 
23

 
17

 
43

 
32

Total net revenues
 
731

 
662

 
1,430

 
1,275

Expenses:
 
 
 
 
 
 
 
 
General and administrative expenses
 
124

 
119

 
245

 
229

Provision for credit losses
 
58

 
62

 
106

 
106

Early termination loss on operating leases
 
36

 
39

 
60

 
56

Loss on derivative instruments
 
174

 
47

 
205

 
310

Gain on foreign currency revaluation of debt
 
(184
)
 
(27
)
 
(146
)
 
(274
)
Total expenses
 
208

 
240

 
470

 
427

Income before income taxes
 
523

 
422

 
960

 
848

Income tax expense
 
135

 
137

 
273

 
253

Net income
 
388

 
285

 
687

 
595

Less: Net income attributable to noncontrolling interest
 
33

 
26

 
60

 
52

Net income attributable to
American Honda Finance Corporation
 
$
355

 
$
259

 
$
627

 
$
543

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Three months ended
September 30,
 
Six months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
388

 
$
285

 
$
687

 
$
595

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(23
)
 
33

 
15

 

Comprehensive income
 
365

 
318

 
702

 
595

Less: Comprehensive income attributable to noncontrolling interest
 
22

 
42

 
67

 
52

Comprehensive income attributable to
American Honda Finance Corporation
 
$
343

 
$
276

 
$
635

 
$
543

  
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
 
595

 
543

 

 

 
52

Other comprehensive income/(loss)
 

 

 

 

 

Dividends declared
 
(235
)
 
(235
)
 

 

 

Balance at September 30, 2018
 
$
16,956

 
$
14,757

 
$
(85
)
 
$
1,366

 
$
918

 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
$
17,268

 
$
15,088

 
$
(118
)
 
$
1,366

 
$
932

Net income
 
687

 
627

 

 

 
60

Other comprehensive income/(loss)
 
15

 

 
8

 

 
7

Dividends declared
 
(292
)
 
(292
)
 

 

 

Balance at September 30, 2019
 
$
17,678

 
$
15,423

 
$
(110
)
 
$
1,366

 
$
999

 
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)
 
 
 
Six months ended
September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
687

 
$
595

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Debt and derivative instrument valuation adjustments
 
24

 
43

Provision for credit losses
 
106

 
106

Early termination loss on operating leases
 
60

 
56

Depreciation on leased vehicles
 
2,827

 
2,736

Accretion of unearned subsidy income
 
(849
)
 
(795
)
Amortization of deferred dealer participation and other deferred costs
 
179

 
166

Gain on disposition of leased vehicles
 
(96
)
 
(94
)
Deferred income taxes
 
198

 
162

Changes in operating assets and liabilities:
 
 
 
 
Income taxes receivable/payable
 
5

 
6

Other assets
 
16

 
(41
)
Accrued interest/discounts on debt
 
23

 
44

Other liabilities
 
(9
)
 
32

Due to/from Parent and affiliated companies
 
48

 
(26
)
Net cash provided by operating activities
 
3,219

 
2,990

Cash flows from investing activities:
 
 
 
 
Finance receivables acquired
 
(9,240
)
 
(10,030
)
Principal collected on finance receivables
 
8,605

 
8,021

Net change in wholesale loans
 
780

 
527

Purchase of operating lease vehicles
 
(9,684
)
 
(8,335
)
Disposal of operating lease vehicles
 
5,861

 
4,990

Cash received for unearned subsidy income
 
637

 
1,059

Other investing activities, net
 
(2
)
 
(3
)
Net cash used in investing activities
 
(3,043
)
 
(3,771
)
 
Statement continues on the next page.

4




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Six months ended
September 30,
 
 
2019
 
2018
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of commercial paper
 
$
16,053

 
$
14,223

Paydown of commercial paper
 
(16,297
)
 
(14,526
)
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
 
1,580

 
2,001

Paydown of related party debt
 
(1,580
)
 
(2,310
)
Proceeds from issuance of medium term notes and other debt
 
4,613

 
3,620

Paydown of medium term notes and other debt
 
(3,553
)
 
(2,277
)
Proceeds from issuance of secured debt
 
2,743

 
2,038

Paydown of secured debt
 
(2,613
)
 
(2,462
)
Dividends paid
 
(292
)
 
(235
)
Net cash provided by/(used in) financing activities
 
(146
)
 
872

Effect of exchange rate changes on cash and cash equivalents
 
1

 
(6
)
Net increase in cash and cash equivalents
 
31

 
85

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
 
$
1,414

 
$
1,311

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
448

 
$
349

Income taxes paid
 
$
37

 
$
79

 
The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows.
 
 
September 30,
 
 
2019
 
2018
Cash and cash equivalents
 
$
808

 
$
787

Restricted cash included in other assets (1)
 
606

 
524

Total
 
$
1,414

 
$
1,311

---------------------------------------------------------
(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's allowance for credit losses is expected to increase upon adoption of this standard. The magnitude of the increase will depend primarily on the composition and seasoning of the retail loan portfolio, existing and forecasted economic conditions, and other management judgments at the adoption date. The Company plans to adopt the new standard and the related amendments effective April 1, 2020, with a cumulative-effect adjustment to opening retained earnings in the period of adoption.
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. 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, 2020.
 

7



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



(2) Finance Receivables
Finance receivables consisted of the following:
 
 
 
September 30, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Finance receivables
 
$
35,920

 
$
4,983

 
$
40,903

Allowance for credit losses
 
(197
)
 

 
(197
)
Deferred dealer participation and other deferred costs
 
452

 

 
452

Unearned subsidy income
 
(935
)
 

 
(935
)
Finance receivables, net
 
$
35,240

 
$
4,983

 
$
40,223

 
 
 
 
 
 
 
 
 
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 principal balance of $9.5 billion and $9.4 billion as of September 30, 2019 and March 31, 2019, respectively, which have been transferred to securitization trusts and are considered to be legally isolated but do not qualify for sale accounting treatment. These finance receivables are restricted as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.
Credit Quality of Financing Receivables
Credit losses are an expected cost of extending credit. The majority of the 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 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 contract. The Company’s determination of whether dealer loans are impaired is based on evaluations of dealership 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 dealer loans that constituted troubled debt restructurings during the six months ended September 30, 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 six months ended September 30, 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 six months ended September 30, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, July 1, 2019
 
$
193

 
$
11

 
$
204

Provision
 
60

 
(2
)
 
58

Charge-offs
 
(80
)
 
(9
)
 
(89
)
Recoveries
 
24

 

 
24

Effect of translation adjustment
 

 

 

Ending balance, September 30, 2019
 
$
197

 
$

 
$
197

Beginning balance, April 1, 2019
 
$
193

 
$
8

 
$
201

Provision
 
97

 
9

 
106

Charge-offs
 
(144
)
 
(17
)
 
(161
)
Recoveries
 
51

 

 
51

Effect of translation adjustment
 

 

 

Ending balance, September 30, 2019
 
$
197

 
$

 
$
197

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

 
$

 
$

Collectively evaluated for impairment
 
197

 

 
197

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
41

 
$
41

Collectively evaluated for impairment
 
35,437

 
4,942

 
40,379

 
 
 
 
 
 
 
 
 
Three and six months ended September 30, 2018
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, July 1, 2018
 
$
183

 
$

 
$
183

Provision
 
52

 

 
52

Charge-offs
 
(65
)
 

 
(65
)
Recoveries
 
21

 

 
21

Effect of translation adjustment
 

 

 

Ending balance, September 30, 2018
 
$
191

 
$

 
$
191

Beginning balance, April 1, 2018
 
$
179

 
$

 
$
179

Provision
 
87

 
(1
)
 
86

Charge-offs
 
(120
)
 

 
(120
)
Recoveries
 
45

 
1

 
46

Effect of translation adjustment
 

 

 

Ending balance, September 30, 2018
 
$
191

 
$

 
$
191

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

 
$

 
$

Collectively evaluated for impairment
 
191

 

 
191

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
174

 
$
174

Collectively evaluated for impairment
 
34,274

 
4,880

 
39,154

 



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)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
New auto
 
$
246

 
$
61

 
$
15

 
$
322

 
$
28,654

 
$
28,976

Used and certified auto
 
93

 
23

 
6

 
122

 
5,062

 
5,184

Motorcycle and other
 
13

 
5

 
3

 
21

 
1,256

 
1,277

Total retail
 
352

 
89

 
24

 
465

 
34,972

 
35,437

Dealer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale flooring
 
1

 

 

 
1

 
3,893

 
3,894

Commercial loans
 

 

 

 

 
1,089

 
1,089

Total dealer loans
 
1

 

 

 
1

 
4,982

 
4,983

Total finance receivables
 
$
353

 
$
89

 
$
24

 
$
466

 
$
39,954

 
$
40,420

 
 
 
 
 
 
 
 
 
 
 
 
 
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)
September 30, 2019
 
 
 
 
 
 
 
 
Performing
 
$
28,900

 
$
5,155

 
$
1,269

 
$
35,324

Nonperforming
 
76

 
29

 
8

 
113

Total
 
$
28,976

 
$
5,184

 
$
1,277

 
$
35,437

 
 
 
 
 
 
 
 
 
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 tables below. Group A includes the loans of dealerships with the strongest internal risk rating. Group B includes the loans of all remaining dealers.
 
 
 
September 30, 2019
 
March 31, 2019
 
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Group A
 
$
2,439

 
$
805

 
$
3,244

 
$
3,121

 
$
823

 
$
3,944

Group B
 
1,455

 
284

 
1,739

 
1,565

 
326

 
1,891

Total
 
$
3,894

 
$
1,089

 
$
4,983

 
$
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:
 
 
 
September 30,
2019
 
March 31,
2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Operating lease vehicles
 
$
43,253

 
$
42,427

Accumulated depreciation
 
(7,977
)
 
(8,262
)
Deferred dealer participation and initial direct costs
 
130

 
119

Unearned subsidy income
 
(1,518
)
 
(1,563
)
Estimated early termination losses
 
(118
)
 
(115
)
Investment in operating leases, net
 
$
33,770

 
$
32,606

 
Operating lease revenue consisted of the following:
 
 
Three months ended
September 30,
 
Six months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Lease payments
 
$
1,669

 
$
1,586

 
$
3,306

 
$
3,153

Subsidy income and dealer rate participation, net (1)
 
245

 
210

 
491

 
412

Reimbursed lessor costs (2)
 
21

 

 
33

 

Total operating lease revenue, net
 
$
1,935

 
$
1,796

 
$
3,830

 
$
3,565


(1)
Includes amortization of initial direct costs during the three and six months ended September 30, 2018.
(2)
Reimbursed lessor costs were presented net during the three and six months ended September 30, 2018.

Leased vehicle expenses consisted of the following:
 
 
Three months ended
September 30,
 
Six months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Depreciation expense
 
$
1,421

 
$
1,361

 
$
2,827

 
$
2,736

Initial direct costs and other lessor costs (1)
 
41

 

 
70

 

Gain on disposition of leased vehicles (2)
 
(53
)
 
(47
)
 
(96
)
 
(94
)
Total leased vehicle expenses, net
 
$
1,409

 
$
1,314

 
$
2,801

 
$
2,642


(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 six months ended September 30, 2018.
(2)
Included in the gain or loss on disposition of leased vehicles are end of term charges of $18 million and $19 million for the three months ended September 30, 2019 and 2018, and $46 million and $40 million for the six months ended September 30, 2019 and 2018, respectively.

Contractual operating lease payments due as of September 30, 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.

13



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


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

 
 
 
2020
 
$
6,123

2021
 
4,473

2022
 
2,272

2023
 
343

2024
 
63

Total
 
$
13,274


The Company recognized early termination losses due to lessee defaults of $36 million and $39 million during the three months ended September 30, 2019 and 2018, and $60 million and $56 million, during the six months ended September 30, 2019 and 2018, respectively. Actual net losses realized totaled $32 million and $21 million for the three months ended September 30, 2019 and 2018, and $56 million and $36 million for the six months ended September 30, 2019 and 2018, respectively.
The general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $7 million and $13 million during the three and six months ended September 30, 2019, respectively. The general allowance for uncollectible operating lease receivables was recorded through a provision for credit losses of $10 million and $20 million during the three and six months ended September 30, 2018, respectively.
No impairment losses due to declines in estimated residual values were recognized during the three and six months ended September 30, 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

 
September 30,
2019
 
March 31,
2019
 
September 30,
2019
 
March 31,
2019
 
September 30,
2019

March 31,
2019

 
 
 
 
 
 
 
 
 



 
 
(U.S. dollars in millions)
 
 
 
 
 
 

 
Unsecured debt:
 
 
 
 
 
 
 
 
 
 

 
Commercial paper
 
$
5,517

 
$
5,755

 
2.11
%
 
2.60
%
 
1.79 - 2.31%

1.79 - 2.71%
Related party debt
 
755

 
749

 
1.97
%
 
2.18
%
 
1.96 - 1.98%

2.02 - 2.31%
Bank loans
 
4,972

 
4,962

 
2.75
%
 
3.16
%
 
2.27 - 3.00%

2.35 - 3.50%
Private MTN program
 
999

 
999

 
3.84
%
 
3.84
%
 
3.80 - 3.88%

3.80 - 3.88%
Public MTN program
 
25,336

 
24,117

 
2.28
%
 
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
 
3,467

 
3,514

 
2.54
%
 
2.50
%
 
1.82 - 3.44%

1.63 - 3.44%
Total unsecured debt
 
41,074

 
40,964

 
 
 
 
 



Secured debt
 
8,934

 
8,790

 
2.45
%
 
2.42
%
 
1.21 - 3.30%

1.16 - 3.30%
Total debt
 
$
50,008

 
$
49,754

 
 
 
 
 



 
As of September 30, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $12.8 billion, long-term debt with fixed interest rates totaled $30.1 billion, and short-term debt totaled $7.1 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 September 30, 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 $5.5 billion and $5.4 billion during the six months ended September 30, 2019 and 2018, respectively. The maximum balance outstanding at any month-end during the six months ended September 30, 2019 and 2018 was $6.2 billion and $5.7 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 $4 million for both the three months ended September 30, 2019 and 2018, and $8 million for both the six months ended September 30, 2019 and 2018.

Bank Loans
Outstanding bank loans at September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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, and includes customary events of default.
The MTN programs are supported by the Keep Well Agreement with HMC described in Note 6.
Other Debt
The outstanding balances as of September 30, 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 securitization trusts. Notes outstanding as of September 30, 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 receivables. 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 September 30, 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 $604 million on a one-year and up to $604 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 September 30, 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. 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 September 30, 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.
 
 
 
September 30, 2019
 
March 31, 2019
 
 
Notional
balances
 
Assets
 
Liabilities
 
Notional
balances
 
Assets
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
59,183

 
$
345

 
$
413

 
$
58,132

 
$
308

 
$
307

Cross currency swaps
 
4,001

 
45

 
152

 
5,002

 
72

 
261

Gross derivative assets/liabilities
 
 
 
390

 
565

 
 
 
380

 
568

Counterparty netting adjustment
     and collateral
 
 
 
(356
)
 
(352
)
 
 
 
(313
)
 
(318
)
Net derivative assets/liabilities
 
 
 
$
34

 
$
213

 
 
 
$
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
September 30,
 
Six months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
31

 
$
8

 
$
(45
)
 
$
20

Cross currency swaps
 
(205
)
 
(55
)
 
(160
)
 
(330
)
Total gain/(loss) on derivative instruments
 
$
(174
)
 
$
(47
)
 
$
(205
)
 
$
(310
)
 
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
September 30,
 
Six months ended
September 30,
Income Statement
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Revenue:
 
 
 
 
 
 
 
 
Subsidy income
 
$
418

 
$
403

 
$
845

 
$
790

Interest expense:
 
 
 
 
 
 
 
 
Related party debt
 
4

 
4

 
8

 
8

Other income, net:
 
 
 
 
 
 
 
 
VSC administration fees
 
28

 
27

 
55

 
54

Support Service Fee
 
(9
)
 
(8
)
 
(18
)
 
(17
)
General and administrative expenses:
 
 
 
 
 
 
 
 
Support Compensation Agreement fees
 
17

 
5

 
34

 
11

Benefit plan expenses
 
3

 
2

 
5

 
5