UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 20192020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the transition period from             to             
Commission File Number 001-36111

AMERICAN HONDA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

California95-3472715
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
20800 Madrona Avenue, Torrance, California90503
(Address of principal executive offices)(Zip Code)
(310) 972-2555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
1.300% Medium-Term Notes, Series A
Due March 21, 2022
2.625% Medium-Term Notes, Series A
Due October 14, 2022
1.375% Medium-Term Notes, Series A
Due November 10, 2022
0.550% Medium-Term Notes, Series A
Due March 17, 2023
0.750% Medium-Term Notes, Series A
Due January 17, 2024
0.350% Medium-Term Notes, Series A
Due August 26, 2022
1.600% Medium-Term Notes, Series A
Due April 20, 2022
1.950% Medium-Term Notes, Series A
Due October 18, 2024

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A


New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☒  Yes    ☐  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes     ☒  No
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
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 May 31, 2019,2020, 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.
Documents incorporated by reference: None

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 I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
 

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AMERICAN HONDA FINANCE CORPORATION
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended March 31, 20192020
Table of Contents
   Page
Item 1. 
Item 1A. 
Item 1B. 
Item 2. 
Item 3. 
Item 4. 
    
Item 5. 
Item 6. 
Item 7. 
  
  
  
  
  
  
  
  
  
Item 7A. 
Item 8. 
Item 9. 
Item 9A. 
Item 9B. 
    
  
Item 10. 
Item 11. 
Item 12. 
Item 13. 
Item 14. 
    
  
Item 15. 
  
Item 16. 

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Cautionary Statement Regarding Forward-Looking Statements
Certain statements included herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “scheduled,” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. In addition, all information included herein with respect to projected or future results of operations, cash flows, financial condition, financial performance, or other financial or statistical matters constitute forward-looking statements. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realized. The following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements:
uncertainties regarding the duration and severity of the COVID-19 pandemic and the measures intended to reduce its spread and their related impact on our operations, liquidity and financial condition;
declines in the financial condition or performance of Honda Motor Co., Ltd. or the sales of Honda or Acura products;
changes in economic and general business conditions, both domestically and internationally, including changes in international trade policy;
fluctuations in interest rates and currency exchange rates;
the failure of our customers, dealers, or counterparties to meet the terms of any contracts with us, or otherwise fail to perform as agreed;
our inability to recover the estimated residual value of leased vehicles at the end of their lease terms;
changes or disruption in our funding sources or access to the capital markets;
changes in our, or Honda Motor Co., Ltd.’s, credit ratings;
increases in competition from other financial institutions seeking to increase their share of financing of Honda and Acura products;
changes in laws and regulations, including the result of financial services legislation, and related costs;
changes in accounting standards;
a failure or interruption in our operations; and
a security breach or cyber attack.
Additional information regarding these and other risks and uncertainties to which our business is subject is contained in “Part I, Item 1A. Risk Factors” in this Annual Report on Form 10-K, as such risks and uncertainties may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. 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.

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PART I
Item 1. Business
Overview
American Honda Finance Corporation (AHFC) is a California corporation that was incorporated on February 6, 1980. 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 its subsidiaries). AHFC is a wholly-owned subsidiary of American Honda Motor Co., Inc. (AHM). 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. AHFC’s principal executive offices are located at 20800 Madrona Avenue, Torrance, California 90503.
We provide various forms of financing in the United States and Canada to purchasers and lessees of Honda and Acura products and authorized independent dealers of Honda and Acura products. Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products and maintain customer and dealer satisfaction and loyalty. Our business is substantially dependent upon the sale of those Honda and Acura products in the United States and Canada and the percentage of those sales financed by us.
We acquire retail loans, primarily installment sale contracts, and leases made to retail customers of Honda and Acura products and we offer wholesale flooring and commercial loans to dealers of Honda and Acura products.
AHM and HCI sponsor incentive-financingincentive financing programs in the United States and Canada, respectively. These programs offer promotional rates on loans and leases to purchasers, lessees, and dealers of Honda and Acura products. AHM or HCI, as applicable, pays a subsidy that enables us to realize a market yield on any financing contract we indirectly or directly finance under these programs.
We acquire and offer, as applicable, substantially similar products and services throughout many different regions, provinces, and territories, subject to local legal restrictions and market conditions. We divide our business segments between our business in the United States and in Canada. For additional financial information regarding our operations by business segment, see Note 15—Segment Information of Notes to Consolidated Financial Statements and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” In the United States and Canada, we provide our financing products under the brand names Honda Financial Services and Acura Financial Services.
Public Filings
Our filings with the Securities and Exchange Commission (SEC) may be found by accessing the SEC website at www.sec.gov The SEC website contains reports, registration statements, and other information regarding issuers that file with the SEC, including us. A direct link to the SEC website and certain of our filings are contained on our website located at www.hondafinancialservices.com under “Investor Relations, SEC Filings”. Additionally, we have made available on our website, without charge, electronic copies of our periodic and current reports that have been filed with the SEC.
Investors and others should note that we announce material financial information using the Investor Relations, SEC Filings section of our corporate website (http://www.hondafinancialservices.com). We use our website and press releases to communicate with our investors, customers and the general public about our company, our services and other matters. While not all of the information that we post on our website is of a material nature, some information could be material. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the Investor Relations, SEC Filings section of our website. Currently, we do not use any social media channels for purposes of communicating such information to the public. Any changes to our communication channels will be posted on the Investor Relations, SEC Filings section of our website. We are not incorporating any of the information set forth on our website into this filing on Form 10‑K.

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Consumer Financing
Retail Loans
We provide indirect financing to retail customers of Honda and Acura products by acquiring retail loans originated by Honda and Acura dealers. Retail loans are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. The products that we finance consist primarily of new and used Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines. Retail loans may also include the financing of insurance products or vehicle service contracts. See “—Vehicle Service Contract Administration” below for more information. The terms of retail loans originated in the United States generally range from 24 to 72 months while the terms of retail loans originated in Canada generally range from 24 to 84 months.
We service all of the retail loans we acquire. We generally hold a security interest in the products purchased through our retail loans. As a result, if our collection efforts fail to bring a delinquent customer’s payments current, we generally can repossess the customer’s vehicle, after satisfying local legal requirements, and sell it at auction. We may waive late payment fees and other fees assessed in the ordinary course of servicing the retail loans and allow payment deferrals by extending the loan’s term. See “—Servicing of Consumer Financing” below for more information.
We require customers that purchase Honda and Acura products through retail loans acquired by us to obtain adequate physical damage, comprehensive and collision insurance.
Retail Leases
We acquire closed-end vehicle lease contracts between Honda and Acura dealers and their customers primarily for leases of new Honda and Acura automobiles. In the case of leases originating in the United States, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the automobile to either our wholly-owned subsidiary, Honda Lease Trust (HLT) or its trustee, HVT, Inc., depending on the applicable state. HLT is a trust established to take assignments of and serve as holder of legal title to leased automobiles. In the case of leases originating in Canada, upon our acquisition of such leases, the dealer assigns all of its rights, title, and interest in the lease and the vehicle to our majority owned subsidiary HCFI.
Leases are acquired in accordance with our underwriting standards. See “—Underwriting and Pricing of Consumer Financing” below for a description of our underwriting process. Terms of the leases generally range from 24 to 60 months. We service the leases we acquire. We may waive late payment fees and other fees assessed in the ordinary course of servicing the leases, extend the lease term, or offer end-of-lease incentives. See “—Servicing of Consumer Financing” below for more information.
Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and at physical auctions. See “—Servicing of Consumer Financing—Remarketing Center” below.
We require the lessee to obtain insurance with adequate public liability and physical damage coverage for the entire lease term.
Underwriting and Pricing of Consumer Financing
Dealers submit customer credit applications electronically through our online system. In addition, AHFC customers are able to submit their own credit applications for pre-approval directly through our website. If our requirements are met, an application received from a dealer is approved automatically. Our system is programmed to review application information for purchase policy and legal compliance. Applications that are not automatically approved are routed to credit buyers located in our regional offices, who will evaluate and make purchase decisions within the framework of our purchase policy and legal requirements.

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We utilize our proprietary credit scoring system to evaluate the credit risk of applicants. Factors used by our credit scoring system to develop a customer’s credit grade include the term of the contract, the loan or lease-to-value ratio, the customer’s debt ratios, and credit bureau attributes, number of trade lines, utilization ratio, and number of credit inquiries. A customer’s credit grade is determined only at the time of origination and is not reassessed during the life of the contract. We utilize different scorecards depending on the type of product we finance and we regularly review and analyze our consumer-financing portfolio to ensure the effectiveness of our underwriting guidelines, purchasing criteria and scorecard predictability of our customers.
In the United States, AHFC utilizes a tiered pricing structure based on customer Fair Isaac Corporation/FICO scores. In Canada, HCFI has a single tiered pricing structure.
Servicing of Consumer Financing
We have eight regional offices in the United States that are responsible for the acquisition, servicing, collection, and customer service activities related to our automobile retail loans and leases. These offices are located in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. We also have one office in Georgia that is responsible for the underwriting of motorcycle, power equipment, and marine engine loans, customer service related to those contracts and collection efforts for past due accounts on a national basis.
In addition to our servicing regions, we have centralized certain operational functions in the United States relating to our automobile retail loans and leases at the National Service Center located in Texas, which contains our National Processing Center, Lease Maturity Center, Remarketing Center, and Recovery and Bankruptcy Center, which are described below:
National Processing Center. The National Processing Center is responsible for processing customer payments that cannot be processed through our automated servicing system, providing service to our Regional Offices and other services.
Lease Maturity Center. Lease accounts are transferred from our regional offices to the Lease Maturity Center six months prior to the end of the lease term. The Lease Maturity Center assumes responsibility for servicing the lease from this time, including providing the leaseholder with end of term options, responding to customer service issues and coordinating end of term vehicle inspections. Once a vehicle is returned to us, the Lease Maturity Center transfers the account to the Remarketing Center to arrange for the disposition of the vehicle.
Remarketing Center. The Remarketing Center oversees the disposition of vehicles returned at the end of leases and after repossession. In order to minimize losses at lease maturity, we have developed remarketing strategies to maximize proceeds and minimize disposition costs on vehicles sold at lease termination. We use various channels to sell vehicles returned at lease end, including a dealer direct, on-line program referred to as the Vehicle Inter-Dealer Purchase System (VIPS) and physical auctions. The goal of our VIPS program is to increase dealer purchases of off-lease vehicles thereby reducing our disposition costs of such vehicles. Through VIPS, the dealer accepting return of the leased vehicle (also referred to as the grounding dealer) initially has the exclusive right to purchase the vehicle at the contractual residual value or a market-based price. If the vehicle is not purchased by the grounding dealer, it then becomes available to Honda and Acura vehicle dealers through the VIPS online auction. If the vehicle is not sold to a Honda or Acura dealer, the auction is opened to any dealer. Off-lease vehicles that are not purchased through a VIPS auction and all repossessed vehicles are sold at physical auction sites throughout the United States. When deemed necessary, we recondition used vehicles prior to sale in order to enhance the vehicle values at auction. Additionally, vehicles to be sold at public auctions may be relocated in accordance with our goal to minimize oversupply at any given location and maximize sales proceeds.
Recovery and Bankruptcy Center. The Recovery and Bankruptcy Center is responsible for collecting the deficiency balances of charged-off accounts using outside collection agencies, locating and securing the collateral of charged-off accounts, and collecting lease end of term fees. Consumer financing contracts are transferred from our regional offices to the Recovery and Bankruptcy Center after charge-off, which occurs when they become 120 days contractually past due, payments due are no longer expected to be received, or the underlying product is sold or has been held in unsold repossessed inventory for 90 days, whichever occurs first. In addition, accounts subject to bankruptcy proceedings are assigned to the Recovery and Bankruptcy Center for tracking, monitoring and handling through the life of the loan or until the related customer is discharged from bankruptcy. If the customer is discharged or dismissed from bankruptcy, the account will return to the original regional office for servicing.

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In Canada, we have two regional offices that are responsible for acquisition, servicing, collection, and customer service activities related to our retail loans and leases. These offices are located in Quebec and Ontario. Similar to our United States operations, in addition to our servicing regions, we have centralized certain operational functions for our Canadian retail loans and leases. These centralized functions are located in Ontario and include our Customer Retention Centre,Center, Recovery Centre,Center, Collections Centre,Center, Customer Service Centre,Center, and Auctions/Remarketing Centre.Center. The services provided by these centralized functions are comparable to the services provided by our National Service Center in the United States.
Recovery Policies and Procedures
We use an account servicing system and an automated dialer system that prioritize collection efforts, generate past due notices, and signal our collections personnel to make telephone contact with delinquent customers. For the purpose of determining whether a retail loan or lease is delinquent, payment is generally considered to have been made upon receipt of 90% of the sum of the current monthly payment due plus any overdue monthly payments.
If necessary, repossession action is taken using bonded and licensed repossession agencies. Subject to a state or provincial laws and recording, filing, and notice requirements, we are generally permitted by applicable state or provincial laws to repossess automobiles or motorcycles upon default by the related customer. We typically decide whether or not to repossess a vehicle when the account is 45 to 60 or more days past due, subject to the laws and regulations governing repossession in the state or province where the automobile or motorcycle is located.
Incentive Financing Programs for Retail Loans and Leases
A substantial portion of our consumer financing business is acquired through incentive financing programs sponsored by AHM and HCI in the United States and Canada, respectively. These programs offer promotional rates on retail loans and leases to purchasers and lessees of Honda and Acura products. AHM or HCI, as applicable, pay us subsidies that enable us to realize a market yield on any financing contract we indirectly finance under these programs. Market yield is based on, among other things, the credit quality of the customer and the length of the contract. The amount of subsidy payments we receive from AHM and HCI is dependent on the terms of the incentive financing programs and the interest rate environment. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The volume of incentive financing programs sponsored by AHM and HCI and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future.future and a significant change in the level of incentive financing programs in a fiscal period typically only has a limited impact on our results of operations for that period. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”
Honda Aviation Financing
Honda Aviation Finance Company LLC, a wholly-owned subsidiary of AHFC, provides financing and account servicing for customers of Honda Aircraft Company LLC, a subsidiary of AHM, in the United States. Customers submit a credit application and if our underwriting policies and legal requirements are met, the retail loan is approved.
Dealer Financing
Wholesale Flooring Loans
We provide wholesale flooring loans to dealers of Honda and Acura automobiles and Honda motorcycles, power equipment, and marine engines through our Dealer Financial Services (DFS) business unit.
Wholesale flooring financing isloans are available primarily through revolving lines of credit and may only be used by dealers to finance the purchase of inventory. AHFC will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to 80%100% of the applicable market value determined in accordance with industry pricing guides in the United States. HCFI will finance new automobiles and motorcycles up to 100% of the dealer invoice price and used automobiles and motorcycles up to the current market value determined in accordance with industry pricing guides in Canada. Dealers pay a variable interest rate on wholesale flooring loans. Wholesale flooring loans must be prepaidrepaid at specified intervals and increments and generally must be paid in full upon the sale of the product. AHM and HCI sponsor incentive-financingincentive financing programs in the United States and Canada, respectively, to Honda and Acura dealers approved for wholesale flooring loans.

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In establishing a wholesale flooring loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, any credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). This data is organized into an electronic scorecard which supports our determination of whether we will provide a wholesale flooring loan and, if so, the amount of the loan and the interest rate. Once a wholesale flooring loan has been approved, we maintain an ongoing review process of the dealerships we finance. We use a third party to perform random periodic on-site physical inspections of financed dealership inventory at a frequency determined by the dealership’s scorecard and financial performance. Monitoring activities are performed more frequently for dealerships with higher levels of credit risk.
We seek to retain a purchase money security interest in all products that are financed pursuant to wholesale flooring loan agreements we enter into with dealers. In addition, we generally secure wholesale flooring loans with liens on the dealership’s other assets and obtain a personal guarantee from dealership owners, as well as corporate guarantees from, or on behalf of, dealership owner(s)’ other dealerships. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. We require dealerships to maintain insurance on all inventory, including peril coverage for flood, hail, wind, false pretense, liability, earthquake, vandalism, and other risks.
In the event of a default on a wholesale flooring loan, we may repossess the financed product, sell the repossessed assets, and seek other available legal remedies pursuant to the related wholesale flooring loan agreement and related guarantees consistent with commercially accepted practices and applicable laws. After the sale of a financed product to consumers in the ordinary course of business, we have no right to recover the product and are limited to the remedies under our wholesale flooring loan agreement with the dealer. Additionally, we have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged, and unregistered vehicle or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.
A wholesale flooring loan is considered delinquent when any payment is contractually past due. Collection efforts are initiated using our staff. We file replevin actions, send past due notices, enter into forbearance agreements, and renegotiate contracts with delinquent dealers. If we determine a dealer cannot meet the obligations under its wholesale flooring loan agreement, legal action may commence. Subject to recording, filing and notice requirements of state, provincial or other laws, we are generally permitted by the applicable laws to repossess the underlying collateral that have not been sold to a buyer in the ordinary course of business.
In the United States, wholesale flooring loans are serviced at AHFC’s regional offices in California, Texas, Massachusetts, Illinois, North Carolina, Delaware, and Georgia. In Canada, wholesale flooring loans are serviced at HCFI’s headquarters in Ontario.
Commercial Loans
We provide commercial loans to Honda and Acura automobile dealers through our DFS business unit. This commercial financing is available primarily through termmortgage loans and are used primarily for financing dealership property or construction, and term loans for financing equipment construction,or facility improvements, and working capital. Dealers generally pay a variableimprovements. We offer either fixed or floating interest rate on commercial loans in the United States. In Canada, dealers pay both fixed rates and variable rates on commercial loans.
In establishing a commercial loan, we conduct a comprehensive review of the dealership, including a review of its business operations and management, appraisals of dealership property, credit reports, financial statements, tax returns, bank references, and/or other available historical credit information and a review of the personal financial statements of the dealership’s individual owner(s). Once the loan has been approved, we maintain an ongoing review process of the dealership we finance, which we believe is consistent with industry practices.
Commercial loans are generally secured by the associated properties, inventory, and other dealership assets. In addition, we generally obtain a personal guarantee from dealership owners, as well as corporate guarantees from, or on behalf of, dealership individual owner(s)’ other dealerships. Although our commercial loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure. Commercial loans are considered delinquent when any payment is contractually past due.
In the United States, commercial loans are serviced at AHFC’s headquarters in California. In Canada, commercial loans are serviced at HCFI’s headquarters in Ontario.

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Competition
The automobile financing industries in the United States and Canada are very competitive. Providers of vehicle and similar product financing have traditionally competed based on interest rates charged, the quality of credit accepted, the flexibility of loan terms offered, the quality of service provided to dealers and customers, and the strength of dealer relationships.
National and regional commercial banks, credit unions, savings and loan associations, finance companies, and other captive finance companies provide consumer financing for new and used Honda and Acura products. Commercial banks, finance companies, and captive finance companies of other manufacturers also provide inventory financing for Honda and Acura dealers. Our primary competition in the wholesale motorcycle, power equipment, and marine engine financing business tends to be local banks and specialty finance firms that are familiar with the particular characteristics of these businesses. In Canada, commercial banks are strong competitors in the automobile consumer financing business.
Relationships with HMC and Other Affiliates
The following is a description of certain relationships with HMC and other affiliates.
HMC and AHFC Keep Well Agreement
HMC and AHFC are parties to a keep well agreement (the HMC-AHFC Agreement), which became effective on September 9, 2005.
Under the terms of the HMC-AHFC Agreement, HMC has agreed to:
own and hold, at all times, directly or indirectly, at least 80% of AHFC’s issued and outstanding shares of voting stock and not pledge, directly or indirectly, encumber, or otherwise dispose of any such shares or permit any of HMC’s subsidiaries to do so, except to HMC or wholly-owned subsidiaries of HMC;
cause AHFC to, on the last day of each of AHFC’s fiscal years, have a positive consolidated tangible net worth (with “tangible net worth” for purposes of this discussion of the HMC-AHFC Agreement understood to mean (a) shareholders’ equity less (b) any intangible assets, as determined in accordance with U.S. generally accepted accounting principles (GAAP)); and
ensure that, at all times, AHFC has sufficient liquidity and funds to meet its payment obligations under any Debt (with “Debt” for purposes of this discussion of the HMC-AHFC Agreement defined as AHFC’s debt for borrowed money that HMC has confirmed in writing is covered by the HMC-AHFC Agreement) in accordance with the terms of such Debt, or where necessary, HMC will make available to AHFC, or HMC will procure for AHFC, sufficient funds to enable AHFC to pay its Debt in accordance with its terms.
The HMC-AHFC Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of AHFC.
The HMC-AHFC Agreement includes AHFC’s agreement that it will use any funds made available to it by HMC thereunder solely for fulfilling AHFC’s payment obligations in respect of Debt. Any claims of HMC arising from any provisions of funds to AHFC by HMC shall be subordinated to the claims of all holders of Debt with respect to such Debt, whether or not such claims exist at the time such funds are made available to AHFC, and HMC will not demand payment of such claims from AHFC unless and until all outstanding Debt has been paid in full.
HMC or AHFC may each terminate the HMC-AHFC Agreement upon giving to the other party 30 days’ prior written notice and the HMC-AHFC Agreement may be modified or amended only by the written agreement of HMC and AHFC and upon 30 days’ prior written notice to each rating agency rating any covered Debt. However, such termination, modification, or amendment will not be effective with respect to any Debt outstanding at the time of such termination, modification, or amendment unless: (i) such termination, modification, or amendment is permitted under the documentation governing such Debt, (ii) all affected holders of such Debt (or, in the case of Debt incurred pursuant to documentation that permits the HMC-AHFC Agreement to be terminated, modified, or amended with the consent of less than all of the holders of such Debt, the requisite holders of such Debt) otherwise consent in writing, or (iii) with respect to Debt that is rated by one or more rating agencies at the request of HMC or AHFC, each such rating agency confirms in writing that the rating assigned to such Debt will not be withdrawn or reduced because of the proposed action.

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An amendment, modification, or termination of the HMC-AHFC Agreement (except as permitted by its terms) wouldmay constitute an event of default under certain of AHFC’s Debt, andsubject to certain limited exceptions contained in the instruments governing such Debt. In addition, failure by HMC to meet its obligations under the HMC-AHFC Agreement would constitute an event of default under such Debt, but only if, in the case of certain of AHFC's Debt, such failure continued for 30 days and was continuing at the time the default was declared.
Under its terms, the HMC-AHFC Agreement is not enforceable against HMC by anyone other than: (i) AHFC or (ii) if any case is commenced under the United States Bankruptcy Code (11 USC §§101 et seq.), or any successor statutory provisions, or the Bankruptcy Code, in respect of AHFC, the debtor in possession or trustee appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-AHFC Agreement and (2) the commencement of such a case under the Bankruptcy Code in respect of AHFC while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of AHFC has already been commenced in such case, to file a petition in respect of AHFC thereunder with a view to the debtor in possession, or the trustee appointed by the court having jurisdiction over such proceeding, pursuing AHFC’s rights under the HMC-AHFC Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that AHFC enforce its rights under the HMC-AHFC Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-AHFC Agreement if AHFC fails or refuses to take action to enforce its rights under that agreement within 30 days following AHFC’s receipt of demand for such enforcement by such holder.
The HMC-AHFC Agreement is governed by and construed in accordance with the laws of the State of New York.
HMC and HCFI Keep Well Agreement
HMC and HCFI are parties to a Keep Well Agreement (the HMC-HCFI Agreement), which became effective on September 26, 2005.
Under the terms of the HMC-HCFI Agreement, HMC has agreed to:
own and hold, at all times, directly or indirectly, at least 80% of HCFI’s issued and outstanding shares of voting stock and not pledge, directly or indirectly, encumber, or otherwise dispose of any such shares or permit any of HMC’s subsidiaries to do so, except to HMC or wholly-owned subsidiaries of HMC;
cause HCFI to, on the last day of each of HCFI’s fiscal years, have a positive consolidated tangible net worth (with “tangible net worth” for purposes of this discussion of the HMC-HCFI Agreement understood to mean (a) shareholders’ equity less (b) any intangible assets, as determined in accordance with generally accepted accounting principles in Canada); and
ensure that, at all times, HCFI has sufficient liquidity and funds to meet its payment obligations under any Debt (with “Debt” for purposes of this discussion of the HMC-HCFI Agreement defined as HCFI’s debt for borrowed money that HMC has confirmed in writing is covered by the HMC-HCFI Agreement) in accordance with the terms of such Debt, or where necessary, HMC will make available to HCFI, or HMC will procure for HCFI, sufficient funds to enable HCFI to pay its Debt in accordance with its terms.
The HMC-HCFI Agreement is not a guarantee by HMC of any Debt or other obligation, indebtedness, or liability of any kind of HCFI.
The HMC-HCFI Agreement includes HCFI’s agreement that it will use any funds made available to it by HMC thereunder solely for the purposes of fulfilling HCFI’s payment obligations in respect of Debt. Any claims of HMC arising from any provisions of funds to HCFI by HMC shall be subordinated to the claims of all holders of Debt with respect to such Debt, whether or not such claims exist at the time such funds are made available to HCFI, and HMC will not demand payment of such claims from HCFI unless and until all outstanding Debt has been paid in full.

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HMC or HCFI may each terminate the HMC-HCFI Agreement upon giving to the other party 30 days’ prior written notice and the HMC-HCFI Agreement may be modified or amended only by the written agreement of HMC and HCFI and upon 30 days’ prior written notice to each rating agency rating any covered Debt. However, such termination, modification, or amendment will not be effective with respect to any Debt outstanding at the time of such termination, modification, or amendment unless: (i) such termination, modification, or amendment is permitted under the documentation governing such Debt, (ii) all affected holders of such Debt (or, in the case of Debt incurred pursuant to documentation that permits the HMC-HCFI Agreement to be terminated, modified, or amended with the consent of less than all of the holders of such Debt, the requisite holders of such Debt) otherwise consent in writing, or (iii) with respect to Debt that is rated by one or more rating agencies at the request of HMC or HCFI, each such rating agency confirms in writing that the rating assigned to such Debt will not be withdrawn or reduced because of the proposed action.
An amendment, modification, or termination of the HMC-HCFI Agreement (except as permitted by its terms) wouldmay constitute an event of default under certain of HCFI’s Debt, andsubject to certain limited exceptions contained in the instruments governing such Debt. In addition, failure by HMC to meet its obligations under the HMC-HCFI Agreement would constitute an event of default under such Debt, but only if, in the case of certain of HCFI's Debt, such failure continued for 30 days and was continuing at the time the default was declared.
Under its terms, the HMC-HCFI Agreement is not enforceable against HMC by anyone other than: (i) HCFI or (ii) if any case is commenced under the Canadian Bankruptcy and Insolvency Act, the Canadian Companies’ Creditors Arrangement Act, or the Canadian Winding Up and Restructuring Act by or against HCFI, the debtor in possession or trustee or receiver appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by HMC in performing a provision of the HMC-HCFI Agreement and (2) the insolvency of HCFI while any Debt is outstanding, the remedies of a holder of Debt shall include the right, if no proceeding in respect of HCFI has already been commenced in such proceeding, to file an application in respect of HCFI for the appointment of a trustee or receiver by the court having jurisdiction over such proceeding in order to pursue HFCI’s rights under the HMC-HCFI Agreement against HMC. However, all holders of outstanding Debt may (i) demand in writing that HCFI enforce its rights under the HMC-HCFI Agreement and (ii) proceed directly against HMC to enforce compliance by HMC with its obligations under the HMC-HCFI Agreement if HCFI fails or refuses to take action to enforce its rights under that agreement within 30 days following HCFI’s receipt of demand for such enforcement by such holder.
The HMC-HCFI Agreement is governed by and construed in accordance with the laws of the State of New York.
Incentive Financing Programs
AHM and HCI sponsor incentive-financingincentive financing programs in the United States and Canada, respectively. These programs offer promotional rates on loans and leases to purchasers, lessees, and dealers of Honda and Acura products. AHM or HCI, as applicable, pay us subsidies that enable us to realize a market yield on any financing contract we indirectly or directly finance under these programs. These subsidy payments supplement the revenues on our financing products offered under our incentive financing programs. See “—Consumer FinancingIncentive Financing Programs for Retail Loans and Leases” above for more information.
Related Party Debt
HCFI issues fixed rate short-term notes to HCI to fund HCFI’s general corporate operations. See Note 4—Debt of Notes to Consolidated Financial Statements for further information regarding our related party debt.
Vehicle Service Contract Administration
Our Consumer Assurance Products and Service Group is responsible for the administration of vehicle service contracts issued by AHM, and wholly-owned subsidiaries of AHM, American Honda Protection Products Corporation (AHPPC) and American Honda Service Contracts Corporation (AHSCC), wholly-owned subsidiaries of AHM.. HCFI performs marketing services for vehicle service contracts issued by HCI. We receive fees to perform administrative and marketing services for AHM, AHPPC, AHSCC or HCI, as applicable.
A vehicle service contract is a contractual agreement between the dealer, manufacturer or an independent third party, and the dealer’s customer. The contract provides for certain repairs, mechanical breakdown coverage, roadside assistance, and/or oil changes for the customer’s new or used automobile. A vehicle service contract can be obtained on both Honda and Acura automobiles.
As the administrator, we approve claims and provide customer service to purchasers of vehicle service contracts. We do not provide the maintenance or roadside assistance provided by the vehicle service contracts.

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Shared Services
Honda North America, Inc. (HNA), a wholly-owned subsidiary of HMC, provides services to Honda’s North American operations. HNA provides us with information technology, legal, internal audit, and other services pursuant to a shared services agreement. HNA is paid a compensation fee for these services.
In Canada, we also share certain common expenditures with HCI, including professional services, data processing services, insurance, policies, software development and facilities.
Benefit Plans
Our employees participate in various employee benefit plans that are sponsored by AHM and HCI, respectively. Refer to Note 8—Benefit Plans of Notes to Consolidated Financial Statements for additional information about employee benefit plans.
Income taxes
AHFC and its United States subsidiaries are included in the consolidated United States federal income tax returns of AHM and many consolidated or combined state and local income tax returns of AHM. In some cases, AHFC and its United States subsidiaries file tax returns separately as required by certain state and local jurisdictions. AHFC and its United States subsidiaries pay for their share of the consolidated or combined income tax on a modified separate return basis pursuant to an intercompany tax allocation agreement with AHM. AHFC and its applicable United States subsidiaries file a separate California return based on California’s worldwide income and apportionment rules. To the extent AHFC and its United States subsidiaries have taxable losses in AHM’s consolidated federal and consolidated or combined state and local tax returns, AHM reimburses AHFC and its United States subsidiaries, as applicable, to the extent the losses are utilized by AHM or another member of the consolidated or combined group under the terms of the intercompany tax allocation agreement. All but an insignificant amount of the federal and state taxes payable or receivable shown on the consolidated balance sheets are due to or from AHM, pursuant to the intercompany tax allocation agreement.
Our Canadian subsidiary, HCFI, files Canadian federal and provincial income tax returns based on the separate legal entity financial statements. HCFI does not file federal, state or local income tax returns in the United States. Consequently, HCFI does not participate in the intercompany tax allocation agreement that AHFC and its United States subsidiaries have with AHM.
Refer to Note 7—Income Taxes of Notes to Consolidated Financial Statements for additional information about income taxes.
Repurchase Agreements
We have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged, and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of its wholesale flooring agreement.
Seasonality
We are subject to seasonal variations in credit losses, which are historically higher in the first and fourth quarters of the calendar year. This seasonality does not have a significant impact on our results of operations. However, the COVID-19 pandemic may have an impact on consumer and dealer behaviors that result in changes in the seasonal fluctuations of our business.
Employee Relations
At March 31, 2019,2020, we had 1,4971,476 employees. We consider our employee relations to be satisfactory. We are not subject to any collective bargaining agreements with our employees.


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Governmental Regulations
Our consumer financing and dealer financing operations are subject to regulation, supervision, and licensing under various United States, Canadian, state, provincial, and local statutes, ordinances and regulations. In recent years, regulators have increased their focus on the regulation of the financial services industry and consumer financing in particular. As a result, there have been and may continue to be proposals for laws and regulations that could increase the scope and nature of laws and regulations that are currently applicable to us. We actively monitor proposed changes to relevant legal and regulatory requirements in order to maintain our compliance. The cost of our ongoing compliance efforts in our consumer financing and dealer financing operations has not had a material adverse effect on our results of operations, cash flows, or financial condition to date, although future compliance efforts may have such an effect.

United States
Our consumer financing operations in the United States are regulated under both federal and state laws, including consumer protection statutes and related regulations. Management believes that AHFC is in compliance in all material respects, with the applicable federal and state laws, including consumer protection statutes and related regulations.
Federal Regulation
We are subject to extensive federal regulation, including the regulations discussed below. These laws, in part, require us to provide certain disclosures prior to and throughout the duration of consumer retail and lease financing transactions and prohibit certain credit and collection practices.
The Truth in Lending Act and the Consumer Leasing Act place disclosure and substantive transaction restrictions on consumer credit and leasing transactions.
The Equal Credit Opportunity Act is designed to prevent discrimination based on certain protected classes in any aspect of a credit transaction, requires the distribution of specified credit decision notices and limits the information that may be requested and considered in a credit transaction.
The Fair Credit Reporting Act imposes restrictions and requirements regarding our use and sharing of credit reports, the reporting of data to credit reporting agencies, credit decision notices, the accuracy and integrity of information reported to the credit reporting agencies, consumer dispute handling procedures, and identity theft prevention requirements.
The Gramm-Leach-Bliley Act requires certain communications periodically with consumers on privacy matters, restricts the disclosure of nonpublic personal information about consumers by financial institutions and prohibits the sharing of account number information for certain marketing purposes.
The Servicemembers Civil Relief Act is federal legislation that provides special protection to certain customers in military service and is designed to protect military personnel from personal hardship or loss resulting from financial obligations while in service.
The Right to Financial Privacy Act restricts the disclosure of customers’ financial records to federal government agencies.
The Telephone Consumer Protection Act governs communication methods that may be used to contact consumers and among other things, prohibits the use of automated dialers to call cellular telephones without consent of the consumer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted in 2010, has broad implications for the financial services industries, including automotive financing, securitizations and derivatives, and requires the development, adoption, and implementation of many regulations which will impact the offering, marketing, and regulation of consumer financial products and services offered by financial institutions. Agencies have issued rules establishing a comprehensive framework for the regulation of derivatives, providing for the regulation of non-bank financial institutions that pose systemic risk, and requiring sponsors of asset-backed securities to retain an ownership stake in securitization transactions. Although we have analyzed these and other rulemakings, the absence of final rules in some cases and the complexity of some of the proposed rules make it difficult for us to estimate the financial, compliance and operational impacts.
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), which has broad rule-making, examination and enforcement authority with respect to the laws and regulations that apply to consumer financial products and services. The CFPB has supervisory, examination and enforcement authority over certain non-depository institutions, including those entities that are largerlarge participants of a market for consumer financial products or services, as defined by rule. We are subject to the CFPB’s supervisory authority with respect to our compliance with applicable consumer protection laws.

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State Regulation
We are also subject to laws and regulations that vary among the states. A majority of states have enacted legislation establishing licensing requirements to conduct consumer-financing activities. We are also periodically subject to state audits and inquiries, which monitor our compliance with consumer and other regulations.
State rules and regulations generally include requirements as to the form and content of finance contracts and limitations on the maximum rate of consumer finance charges, including interest rate. In periods of high interest rates, interest rate limitations could have an adverse effect on our operations if we are unable to pass on our increased costs to our customers or dealers. State rules and regulations also restrict collection practices and creditor’s rights regarding our consumer accounts.

Canada
The consumer financing and dealer financing operations of HCFI are regulated under both Canadian federal and provincial law. Management believes that HCFI is in compliance in all material respects with the applicable statutes and regulations of the federal government of Canada, its jurisdiction of incorporation, as well as applicable provincial statutes and regulations.
Item 1A. Risk Factors
We are exposed to certain risks and uncertainties that could have a material adverse effect on our business, results of operations, cash flows, financial condition, or on our ability to service our indebtedness. There may be additional risks and uncertainties (either currently unknown or not currently believed to be material) that could have a material adverse effect on our business, results of operations, cash flows, financial condition, or on our ability to service our indebtedness.
Risks Relating To Our Business
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition.
The ongoing global COVID-19 pandemic could materially adversely affect our business, results of operations, cash flows and financial condition. For instance, the COVID-19 pandemic and the actions taken to slow its spread, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have impacted and may continue to impact our workforce and have resulted in and may continue to result in the temporary closure of the sales operations of a number of Honda and Acura dealerships. A large portion of our workforce is temporarily working remotely. This may negatively affect our business, particularly if our infrastructure and information technology systems are not capable of supporting our remote work force or otherwise experience business interruptions or failed processes or if most of our workforce transitions to working from home.
The COVID-19 pandemic and the related restrictions have also adversely affected the business of our parent, AHM, and our ultimate parent, HMC, in a number of ways, including the temporary suspension of production at all plants in North America, which continued through the start of May, and selected plants in countries outside of North America. There is a possibility of additional suspensions of production depending on whether there is a resurgence of COVID-19 in a given area. Disruption in the supply chain of the vehicles we finance may contribute to a significant decline in the sale of Honda and Acura products and our financing of those products. In addition, disruptions in the sales operations of dealerships and declines in consumer demand have and may continue to negatively impact the sale of Honda and Acura products.
The COVID-19 pandemic and the related restrictions have also caused an economic slowdown, an increase in unemployment claims, and have resulted and are expected to continue to result in decreased consumer spending. We expect these events will result in higher consumer delinquencies and defaults, lower used vehicle prices, or cause other unpredictable and adverse effects, including adversely affecting the financial condition of dealers. Similar to relief options we have previously offered to customers and dealers impacted by natural disasters, we are currently offering payment relief options to those customers and dealers impacted by COVID-19, including payment deferrals, contract extensions, waiver of late charges, interest deferments for dealer floorplans, and interest only payments for dealer commercial loans. Unlike the relief options we have historically offered for natural disasters, which were limited to the affected geographies, the foregoing relief is currently being offered through the end of June 2020 across the United States and Canada due to the widespread impact of the COVID-19 pandemic. These relief options may not be sufficient to avoid defaults for many of our customers. Charge-offs of retail loans and realized losses on early terminations of operating leases are expected to increase significantly. In addition, sustained declines in used vehicle prices may result in significant increases in depreciation expense over the remaining lease term and, depending on the severity of the decline, potential impairment charges on our operating leases.

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The COVID-19 pandemic has also led to disruption and volatility in the global capital markets, which has increased and may continue to increase our cost of capital and has adversely affected and may continue to adversely affect our ability to access the capital markets. In addition, the foregoing events and the uncertainty relating thereto have adversely affected our short-term and long-term credit ratings and may continue to further adversely affect our ratings. For example, on March 27, 2020, Moody’s Investors Service downgraded our short-term and long-term issuer ratings to P-2 and A3, respectively, and placed those ratings under review for further downgrade. On June 8, 2020, Moody's Investors Service confirmed our issuer ratings and changed its outlook to negative from rating under review. Additionally, on May 20, 2020, S&P Global Ratings downgraded our short-term and long-term issuer ratings to A-2 and A- respectively, with negative outlook. With the S&P Global Ratings downgrade to our short-term issuer rating, we have lost our Tier-1 commercial paper issuer status, which has increased our costs in the commercial paper markets. Additionally, further downgrades or placement on review for possible downgrades of our long-term unsecured ratings could also result in an increase in our borrowing costs as well as reduced access to global debt capital markets.
The duration and potential resurgence of the COVID-19 pandemic is uncertain, and the extent to which the COVID-19 outbreak adversely impacts our business, results of operations, cash flows and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the related actions taken to contain its impact. While we do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole, the effects could have a material adverse effect on our business, financial condition, results of operations, and cash flows, including further increases in our allowance and provision for credit losses and early termination losses on operating leases. Moreover, many risk factors set forth in this Annual Report on Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

Our results of operations, cash flows, and financial condition are substantially dependent upon HMC and the sale of Honda and Acura products and any decline in the financial condition of HMC or the sales of Honda and Acura products could have a materially unfavorableadverse impact on our financial condition, cash flows, and results of operations.
Our results of operations, cash flows, and financial condition are substantially dependent upon the sale of Honda and Acura products in the United States and Canada. Any prolonged reduction or suspension of HMC’s production or sales of Honda or Acura products in the United States or Canada resulting from a decline in demand, a change in consumer preferences, a decline in the actual or perceived quality, safety, or reliability of Honda and Acura products, a reduction of incentive financing programs, volatility in fuel prices, sustained economic stagnation or the occurrence of a recession, a financial crisis, a work stoppage, governmental action, including a change in regulation, trade policies, adverse publicity, a recall, a war, a use of force by foreign countries, a terrorist attack, a multinational conflict, a natural disaster, an epidemic,a pandemic, or similar events could have a substantially unfavorable effect on us.
The production and sale of HMC’s products will depend significantly on HMC’s ability to continue its capital expenditure and product development programs and to market its vehicles successfully. This ability is subject to several risks, including:
any prolonged reduction or suspension of production or sales as discussed above;
rapid changes in HMC’s industry, including advancement of technology and the introduction of new types of competitors who may possess various innovations;
discovery of defects in vehicles which could lead to recall campaigns and suspended sales;
volatility in the price of automobiles, motorcycles, power equipment and marine products;
currency and interest rate fluctuation affecting pricing of products sold and materials purchased and any derivative financial instruments used to hedge against these risks;
extensive environmental and government regulation of the automotive, motorcycle, and power product industries;
the inability to protect and preserve its valuable intellectual property;
legal proceedings, which could adversely affect business, financial condition, cash flows, or results of operations;
reliance on external suppliers for the provision of raw materials and parts used in the manufacturing of its products;
increased costs from conducting business worldwide;
inadvertent disclosures of confidential information despite internal controls and procedures; and
pension costs and benefit obligations.

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Additionally, our credit ratings depend, in large part, on the existence of the Keep Well Agreements with HMC and on the financial condition and results of operations of HMC. If these arrangements (or replacement arrangements acceptable to the rating agencies, if any) become unavailable to us, or if a credit rating of HMC is lowered, our credit ratings will also likely be adversely impacted, leading to higher borrowing costs.

Because our operations are heavily dependent on retail sales of motor vehicles and other retail products, a decline in general business and economic conditions can have a significant adverse impact on our results of operations, cash flows, and financial condition.
Because our operations are heavily dependent on retail sales of motor vehicles and other retail products, general business and economic conditions have a significant impact on our operations. In particular, changes in the following events can adversely affect our results of operations, cash flows, and financial condition:
changes in the United States or Canadian economies;
changes in the overall market for consumer financing or dealer financing;
changes in consumer trends and preferences within the automotive industry
changes in the United States and Canadian regulatory environment;
a decline or slowdown in the new or used vehicle market;
increased fuel prices;
inflation; and
the fiscal and monetary policies in the countries in which we issue debt.
Elevated levels of market disruption and volatility could adversely affect our ability to access the global capital markets in a similar manner and at a similar cost as we have had in the past. These market conditions could also have an adverse effect on our results of operations, cash flows, and financial condition by diminishing the value of financial assets. If, as a result, we increase the rates we charge to our customers and dealers, our competitive position could be negatively affected.
Additionally, the United States and Canada have experienced periods of economic slowdown and recession. These periods have been accompanied by decreases in consumer demand for automobiles and other products. High unemployment, decreases in home values, and lack of availability of credit may lead to increased default rates. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which returned or repossessed automobiles may be sold or delay the timing of these sales. Dealers may also be affected by an economic slowdown or recession, which in turn may increase the risk of default of certain dealers within our wholesale flooring and commercial financing portfolios.
Fluctuations in interest rates could have an adverse impact on our results of operations, cash flows, and financial condition.
Our results of operations, cash flows, and financial condition could be adversely affected during any period of changing interest rates, possibly to a material degree. Interest rate risks arise from the mismatch between assets and the related liabilities used for funding. We provide consumer financing, dealer financing, incentive financing, originations and servicing, all of which are exposed, in varying degrees, to changes in value due to movements in interest rates. Further,Furthermore, an increase in interest rates could increase our costs of providing dealer and consumer financing originations, which could, in turn, adversely affect our financing volumes because financing can be less attractive to our dealers and customers and qualifying for financing may be more difficult.
We monitor the interest rate environment and enter into various financial instruments, including interest rate and basis swaps, to manage our exposure to the risk of interest rate fluctuations. However, our hedging strategies may not fully mitigate the impact of changes in interest rates. Further, these instruments contain an element of risk in the event the counterparties are unable to meet the terms of the agreements. For example, in July 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. At this time, it is unclear if LIBOR will continue to exist, if new methods of calculating LIBOR will be established or if a new alternative reference rate will replace LIBOR. The potential impact of changes to LIBOR or a possible new alternative reference rate is unknown and could adversely affect the market valuation of LIBOR-linked securities, loans and other financial obligations, the interest rates on our current or future cost of funds and/or access to capital markets. See “—The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition” below.

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Our results of operations, cash flows, and financial condition may be adversely affected because of currency risk.
Currency risk or exchange rate risk refers to potential changes of value of financial assets, including Canadian dollar denominated finance receivables, foreign currency denominated debt or derivatives used to manage exposure of foreign currency denominated debt in response to fluctuations in exchange rates of various currencies. Changes in exchange rates can have adverse effects on our results of operations, cash flows, and financial condition.

We monitor the exchange rate environment and enter into various financial instruments, including currency swap agreements, to manage our exposure to the risk of exchange rate fluctuations. However, our hedging strategies may not fully mitigate the impact of changes in exchange rates. Further, these instruments contain an element of risk in the event the counterparties are unable to meet the terms of the agreements. See “—The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition” below.
We need substantial capital to finance our operations and a disruption in our funding sources and access to the capital markets would have an adverse effect on our results of operations, cash flows, and financial condition.
We depend on a significant amount of financingcapital funding to operate our business. Our business strategies utilize diverse sources to fund our operations, including the issuance of commercial paper, medium term notes, asset-backed securities, bank loans and borrowings from AHM and HCI, as applicable.
The availability of these financing sources at the prices we desire may depend on factors outside of our control, including our credit ratings, disruptions to the capital markets, the fiscal and monetary policies of government, government regulations and industry standards. In the event that we are unable to raise the funds we require at reasonable rates, we may curtail our various loan originations or incur the effects of increased costs of operation. Reducing loan originations or increasing the rates we charge consumers and dealers may adversely affect our ability to remain a preferred source of financing for consumers and dealers for Honda and Acura products and will have an adverse effect on our results of operations, cash flows, and financial condition. See “—Fluctuations in interest rates could have an adverse impact on our results of operations, cash flows, and financial condition” above.
Our borrowing costs and access to the debt capital markets depend significantly on our credit ratings, the credit ratings of HMC and the Keep Well Agreements.
The cost and availability of financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Our credit ratings depend, in large part, on the existence of the Keep Well Agreements with HMC and on the financial condition and results of operations of HMC. If these arrangements (or replacement arrangements acceptable to the rating agencies, if any) become unavailable to us, or if a credit rating of HMC is lowered, our credit ratings will also likely be adversely impacted, leading to higher borrowing costs.

Credit rating agencies that rate the credit of HMC and its affiliates, including AHFC, may qualify, alter, or terminate their ratings at any time. For example, Moody's Investors Service downgraded the credit rating of Honda Motor Co., Ltd. on March 26, 2020, and downgraded our credit ratings on March 27, 2020. Additionally, S&P Global Ratings downgraded the credit rating of Honda Motor Co., Ltd. and its subsidiaries, including us, on February 6, 2019. May 20, 2020. See above under "The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition." for additional information.Global economic conditions and other geopolitical factors may directly or indirectly affect such ratings. Any downgrade in the sovereign credit ratings of the United States, Japan, or Canada may directly or indirectly have a negative effect on the ratings of HMC and AHFC. Downgrades, the change to a negative outlook, or placement on review for possible downgrades of such ratings have resulted and could continue to result in an increase in our borrowing costs as well as reducedand could reduce our access to global debt capital markets. These factors would have a negative impact on our business, including our competitive position, results of operations, cash flows and financial condition.


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We are subject to consumer and dealer credit risk, which could adversely impact our results of operations, cash flows, and financial condition.
Credit risk is the risk of loss arising from the failure of a consumer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed. 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. Our level of credit risk on our consumer financing portfolios is influenced primarily by two factors: the total number of contracts that default, and the amount of loss per occurrence, net of recoveries, which in turn are influenced by various factors, such as the used vehicle market, our purchase quality mix, contract term lengths, operational changes, and certain economic factors such as unemployment, levels of consumer debt service burden and personal income growth rates. Our level of credit risk on our dealer-financing portfolio is influenced primarily by the financial strength of dealers within the portfolio, the concentration of dealers demonstrating financial strength, the quality of the collateral securing the financing within the portfolio and economic factors. An increase in credit risk would increase our provision for credit losses and early termination losses on operating lease assets, which would have a negative impact on our results of operations, cash flows, and financial condition.
We manage credit risk by managing the credit quality of our consumer financing and dealer financing portfolios, pricing contracts for expected losses and focusing collection efforts to minimize losses. However, our monitoring of credit risk and our efforts to mitigate credit risk may not be sufficient to prevent a material adverse effect on our results of operations, cash flows, and financial condition.

We are exposed to residual value risk on the vehicles we lease.
Customers of leased vehicles typically have an option to return the vehicle to the dealer at the end of the lease term or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and physical auctions. Residual value risk is the risk that the contractual residual value determined at lease inception will not be recoverable at the end of the lease term. When the market value of a leased vehicle at contract maturity is less than its contractual residual value, there is a higher probability that the vehicle will be returned to us. As a result, we are exposed to risk of loss on the disposition of leased vehicles to the extent that sales proceeds are not sufficient to cover the carrying value of the leased asset at termination. Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, adverse economic conditions, preferences for particular types of vehicles, new vehicle pricing, new vehicle incentive financing programs, new vehicle sales, the actual or perceived quality, safety, or reliability of vehicles, recalls, future plans for new Honda and Acura product introductions, competitor actions and behavior, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values, and fuel prices. See “—We are subject to consumer and dealer credit risk, which could adversely impact our results of operations, cash flows, and financial condition” above.
Our leasing volumes and those of the automotive industry have increased significantly in recent years. As a result, the supply of off-lease vehicles will continue to increase over the next several years, which could negatively affect used vehicle prices. Our results of operations, cash flows, and financial condition could be adversely affected by declines in the value of returned lease vehicles.
We are required to apply significant judgments and assumptions in the preparation of our financial statements, and actual results may vary from those assumed in our judgments and assumptions.
Certain of our accounting policies require the application of our most difficult, subjective, or complex judgments, often requiring us to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition and results of operations.
We maintain an allowance for credit losses for management’s estimate of probable losses incurred on our finance receivables. We also maintain an estimate for early termination losses on operating lease assets due to lessee defaults and an allowance for credit losses on past due operating lease rental payments. Our allowance for credit losses and early termination losses on operating leases requires significant judgment about inherently uncertain factors. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates, which may have a negative impact on our results of operations, cash flows and financial condition. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Credit Losses” for additional information regarding our estimates.

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We maintain projections for expected residual values and return volumes of the vehicles we lease. Actual proceeds realized by us upon sales of returned leased vehicles at lease termination might be lower than the projected amount, which would reduce the profitability of the lease transaction and could have the potential to adversely affect our gain or loss on the disposition of lease vehicles and our results of operations, cash flows and financial condition. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Determination of Lease Residual Values” for additional information regarding our estimates.

The failure or commercial soundness of our counterparties and other financial institutions may have an adverse effect on our results of operations, cash flows, or financial condition.

We have exposure to many different financial institutions, and we routinely execute transactions with counterparties in the financial industry. Our debt, derivative and investment transactions, and our ability to borrow under committed and uncommitted credit facilities, could be adversely affected by the creditworthiness, actions, and commercial soundness of these financial institutions. Deterioration of social, political, labor, or economic conditions along with increased regulation in a specific country or region may also adversely affect the ability of financial institutions, including our derivative counterparties and lenders, to perform their contractual obligations. Financial institutions are interrelated because of trading, clearing, lending, and other relationships, and as a result, financial and political difficulties in one country or region may adversely affect financial institutions in other jurisdictions, including those with which we have relationships. The failure of any financial institution and other counterparty to which we have exposure, directly or indirectly, to perform their contractual obligations, and any losses resulting from that failure, could have a material adverse effect on our results of operations, cash flows, or financial condition.


If we are unable to compete successfully or if competition continues to increase in the businesses in which we operate, our results of operations, cash flows, and financial condition could be materially and adversely affected.
The finance industries in the United States and Canada are highly competitive. We compete with national and regional commercial banks, credit unions, savings and loan associations, finance companies, and other captive finance companies that provide consumer financing for new and used Honda and Acura products. Additionally, Canadian commercial banks are strong competitors in the automobile consumer financing markets. Commercial banks, finance companies, and captive finance companies of other manufacturers also provide wholesale flooring financing for Honda and Acura dealers. Our primary competition in the wholesale motorcycle, power equipment, and marine engine financing business tends to be local banks and specialty finance firms that are familiar with the particular characteristics of these businesses. Changes in the financial services industry resulting from technological innovations and changes in consumer preferences in how they seek financing may also result in increased competition. Our ability to maintain and expand our market share is contingent upon, among other things, us offering competitive pricing, the quality of credit accepted, the flexibility of loan terms offered, the quality of service provided to dealers and customers and strong dealer relationships. Our inability to compete successfully, as well as increases in competitive pressures, could have an adverse impact on our contract volume, market share, revenues, and margins and have a material adverse effect on us.
Our results of operations may be adversely affected by the rate of prepayment of our financing and leasing contracts.
Our financing and leasing contracts may be repaid by borrowers at any time at their option. Early repayment of contracts will limit the amount of earnings we would have otherwise generated under those contracts and we may not be able to reinvest the portions repaid early immediately into new loans and new leases or loans and leases with similar pricing.
Changes in laws and regulations, or the application thereof, may adversely affect our business, results of operations, cash flows, and financial condition.
Our operations are subject to regulation, supervision, and licensing under various United States, Canadian, state, provincial, and local statutes, ordinances, and regulations. A failure to comply with applicable regulatory, supervisory, or licensing requirements may adversely affect our business, results of operations, cash flows, and financial condition. Due to events in the global financial markets, regulators have increased their focus on the regulation of the financial services industry. As a result, there have been and may continue to be proposals for laws and regulations that could increase the scope and nature of laws and regulations that are currently applicable to us. Any change in such laws and regulations, whether in the form of new or amended laws or regulations, regulatory policies, supervisory action, or the application of any of the above, may adversely affect our business, results of operations, cash flows, and financial condition by increasing our costs to comply with the new laws, prohibiting or limiting the amount of certain revenues we currently receive, or constraining certain collection or collateral recovery action which are currently available to us. See “—The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition” above.

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Financial or consumer regulations may adversely affect our business, results of operations, cash flows and financial condition.
The Dodd-Frank Act is extensive and significant legislation that, among other things:
created a liquidation framework for purposes of liquidating certain bank holding companies or other nonbank financial companies determined to be “covered financial companies,” and certain of their respective subsidiaries, defined as “covered subsidiaries,” if, among other conditions, it is determined such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States;
created the CFPB, an agency with broad rule-making examination and enforcement authority with respect to the laws and regulations that apply to consumer financial products and services, such as the extension of credit to finance the purchase of automobiles and motorcycles;
created a new framework for the regulation of over-the-counter derivatives activities; and
strengthened the regulatory oversight of securities and capital markets activities by the SEC.
The scope of the Dodd-Frank Act has broad implications for the financial services industry, including us, and requires the implementation of numerous rules and regulations. The Dodd-Frank Act affects the offering, marketing, and regulation of consumer financial products and services offered by financial institutions. The potential impact of the Dodd-Frank Act and its rules and regulations may include supervision and examination, limitations on our ability to expand product and service offerings and new or modified disclosure requirements.

The CFPB has supervisory, examination and enforcement authority over certain non-depository institutions, including those entities that are larger participants of a market for consumer financial products or services, as defined by rule. We are subject to the CFPB’s supervisory authority with respect to our compliance with applicable consumer protection laws. For example, in July 2015 we reached a settlement with the CFPB and the U.S. Department of Justice and entered into consent orders related to their investigation of, and allegations regarding pricing practices by dealers originating automobile retail installment sales contracts that we purchased. As a part of the consent orders, we implemented a new dealer compensation policy and agreed to maintain general compliance management systems reasonably designed to assure compliance with all relevant federal consumer financial laws. Over the past few years, the CFPB has become active in investigating the products, services and operations of credit providers. The CFPB’s investigations of, and initiation of enforcement actions against, credit providers, whether on its own initiative or jointly with other agencies and regulators, may continue for the foreseeable future.
We are also subject to state laws and regulations that vary among the states. A majority of states have enacted legislation establishing licensing requirements to conduct consumer-financing activities. We are also periodically subject to state audits and inquiries, which monitor our compliance with consumer and other regulations. We expect state regulators to continue their supervision and regulation of financial products and services within their jurisdictions.
Compliance with the regulations under the Dodd-Frank Act or the oversight of the SEC, CFPB, state regulators or other governmental entities and enforcement actions, if any, may impose costs on, create operational constraints for, or place limits on pricing with respect to, finance companies such as us. Such compliance and enforcement actions may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, reduce our profitability, affect our reputation, or otherwise adversely affect our business.
Adverse economic conditions or changes in laws in states or provinces in which we have customer concentrations may negatively affect our results of operations, cash flows, and financial condition.
We are exposed to geographic concentration risk in our consumer financing operations. Factors adversely affecting the economy and applicable laws in various states or provinces where we have concentration risk, such as California and New York, could have an adverse effect on our results of operations, cash flows, and financial condition.
A failure or interruption in our operations could adversely affect our results of operations and financial condition.
Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud, cybersecurity breaches, or natural disasters. Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, inappropriate behavior or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses, regulatory inquiries or other damage to us, including damage to our reputation.

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We rely on internal and external information technology systems to help us manage and maintain our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. Any failure, upgrade, replacement or interruption of these systems could disrupt our normal operating procedures and have an adverse effect on our results of operations, cash flows, and financial condition.
We also rely on a framework of internal controls designed to provide a sound and well-controlled operating environment. Due to the complexity of our business and the challenges inherent in implementing control structures across large organizations, control issues could be identified in the future that could have a material adverse effect on us.

A security breach or a cyber attack may adversely affect our business, results of operations and financial condition.
A security breach or cyber attack of our systems could interrupt, damage or harm our operations or result in the slow performance or unavailability of our information systems for some customers. We collect, analyze and retain certain types of personally identifiable and other information pertaining to our customers and employees through internal and third party information technology systems. We also store confidential business, employee and technical information. A security breach or cyber attack of these systems, including those caused by physical or electronic break-ins, computer virus, malware, attacks by hackers or foreign governments, disruptions from authorized access and tampering (including through social engineering such as phishing attacks) and similar breaches, could expose us to a risk of loss of this information, regulatory scrutiny, claims for damages, penalties, litigation, reputational harm, and a loss of confidence that could potentially have an adverse impact on current and future business with current and potential customers. Information security risks have increased recently because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, and others. In some cases, it may be difficult to anticipate or immediately detect security breaches and the damage they cause. We monitor and review our security systems and by using a Total Quality Management methodology, we update the posture of these systems based on the current threat environment.
We may not be able to anticipate or implement effective preventative measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. It is also possible that our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. The occurrence of any of these events could have a material adverse effect on our business. For example, in June 2020, HMC and its subsidiaries, including AHFC and HCFI, experienced a cyber-attack. As a result, certain business operations were temporarily suspended but have since resumed. HMC and affected subsidiaries are continuing to investigate, including the identity of the attackers and the method by which they gained access. As of the date of this report, no damages to customers or other third parties, such as leaks of information, have been confirmed. While countermeasures have been taken to minimize the impacts of the attack and prevent similar or additional attacks, because the investigation has not been completed yet, there may be undetected impacts of the attack, and the countermeasures may not be sufficient to prevent similar or additional attacks.
We are subject to various privacy, data protection and information security laws, including requirements concerning security breach notification. Compliance with current and future privacy, data protection and information security laws affecting customer or employee data to which we are subject could result in higher compliance and technology costs. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, damage to our reputation and could materially and adversely affect our profitability.
Our defined benefit plan costs and those of AHM and HCI may affect our financial condition, cash flows, and results of operations.
Our employees may participate in either AHM’s or HCI’s defined benefit plans. HMC also has a defined benefit plan but a great majority of our employees do not participate in that plan. The amount of pension benefits and lump-sum payments provided in those plans are primarily based on the combination of years of service and compensation. AHM and HCI each determine and make periodic contributions to their respective defined benefit plans pursuant to applicable regulations and we are allocated our share of pension plan costs due to the participation of our employees. Since benefit obligations and pension costs are based on many assumptions, including, but not limited to, participant mortality, discount rate, rate of salary increase, expected long-term rate of return on plan assets, differences in actual expenses and costs or changes in those assumptions could affect AHM’s, HCI’s, and our cash contributions and liquidity. Under the Employee Retirement Income Security Act of 1974 (ERISA), we are jointly and severally liable for the obligations under AHM’s plans that are subject to ERISA, even for participants in the plans that are not our employees.

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Vehicle recalls and other announcements may impact our business
From time to time, AHM and/or HCI may recall, suspend sales and production of, or initiate market actions on certain Honda or Acura products to address performance, customer satisfaction, compliance or safety-related issues. Because our business is substantially dependent upon the sale of Honda and Acura products such actions may negatively impact our business. A decrease in the level of vehicle sales would negatively impact our financing volume. Additionally, recalls may affect the demand for used recalled vehicles, or impact our timely disposal of repossessed and returned lease vehicles, which may affect the sales proceeds of those vehicles. For example, during fiscal years 2016 and 2017, we experienced delays in the disposition of returned lease vehicles due to a recall of certain Honda and Acura vehicles. The delays in disposition resulted in the recognition of impairment losses, additional depreciation expense, and lower gains on the disposition of lease vehicles due to the negative impact on the sales proceeds of the affected vehicles.
Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
Our headquarters are located in Torrance, California. Our United States operations have regional offices and national servicing centers located in California, Georgia, Texas, Massachusetts, Illinois, North Carolina, and Delaware. HCFI’s headquarters are located in Markham, Ontario, Canada and our Canadian operations have regional offices and national servicing centers located in Quebec and Ontario. All premises are occupied pursuant to lease agreements.
We believe that our properties are suitable to meet the requirements of our business.
Item 3. Legal Proceedings
For information on our legal proceedings, see Note 9—Commitments and Contingencies—Legal Proceedings and Regulatory Matters of Notes to Consolidated Financial Statements, which is incorporated by reference herein.
Item 4. Mine Safety Disclosures
Not applicable.


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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All of the outstanding common stock of AHFC is owned by AHM. Accordingly, shares of our common stock are not listed on any national securities exchange, there is no established public trading market for AHFC’s common stock, and there is no intention to create a public market or list the common stock on any securities exchange. As of the date of this annual report, there are no shares of AHFC common stock that are subject to outstanding options or warrants to purchase, or securities convertible into AHFC common stock. No shares of AHFC common stock can be sold pursuant to Rule 144 under the Securities Act of 1933, as amended.
Dividends are declared and paid by AHFC if, when, and as determined by its Board of Directors. AHFC declared and paid semi-annual cash dividends to its parent, AHM, of $292 million and $313 million during the fiscal year ended March 31, 2020 and $235 million and $271 million during the fiscal year ended March 31, 2019 and $141 million and $206 million during the fiscal year ended March 31, 2018.2019.
Item 6. Selected Financial Data
The following information is a historical summary only and should be read in conjunction with, and is qualified in its entirety by reference to, the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes included elsewhere in this annual report.
We derived the consolidated balance sheet data as of March 31, 20192020 and 20182019 and the consolidated statements of income data for the fiscal years ended March 31, 2020, 2019 2018 and 20172018 from our audited consolidated financial statements included elsewhere in this annual report. We derived the consolidated balance sheet data as of March 31, 20172018 from our audited consolidated financial statements that are not included in this annual report. Our historical results are not necessarily indicative of the results to be expected in any future period.
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Consolidated Statement of Income Data          
Revenues:          
Retail loans and direct financing leases$1,614
 $1,382
 $1,222
Retail loans$1,737
 $1,614
 $1,382
Dealer loans232
 175
 147
222
 232
 175
Operating leases7,253
 6,890
 6,333
7,749
 7,253
 6,890
Total revenues9,099
 8,447
 7,702
9,708
 9,099
 8,447
Depreciation on operating leases5,520
 5,481
 5,056
Leased vehicle expenses (1)
5,693
 5,389
 5,391
Interest expense1,190
 897
 728
1,241
 1,190
 897
Net revenues2,389
 2,069
 1,918
2,774
 2,520
 2,159
Gain on disposition of lease vehicles131
 93
 43
Other income71
 56
 105
88
 71
 56
Total net revenues2,591
 2,218
 2,066
2,862
 2,591
 2,215
Expenses:          
General and administrative expenses456
 439
 434
498
 456
 439
Provision for credit losses249
 244
 210
402
 249
 244
Impairment loss on operating leases14
 
 

 14
 
Early termination loss on operating leases101
 108
 73
331
 101
 108
Loss on lease residual values
 3
 15
(Gain)/Loss on derivative instruments509
 (550) 315
305
 509
 (550)
(Gain)/Loss on foreign currency revaluation of debt(407) 494
 (171)(107) (407) 494
Total expenses922
 738
 876
1,429
 922
 735
Income before income taxes1,669
 1,480
 1,190
1,433
 1,669
 1,480
Income tax expense/(benefit)428
 (2,629) 437
Income tax expense/(benefit) (2)
424
 428
 (2,629)
Net income1,241
 4,109
 753
1,009
 1,241
 4,109
Less: Net income attributable to noncontrolling interest96
 100
 70
97
 96
 100
Net income attributable to American Honda Finance Corporation$1,145
 $4,009
 $683
$912
 $1,145
 $4,009

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March 31,March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Consolidated Balance Sheet Data          
Finance receivables, net (1):
     
Retail loans and direct financing leases$34,792
 $32,649
 $31,047
Finance receivables, net (3):
     
Retail loans$34,318
 $34,790
 $32,640
Dealer loans5,835
 5,495
 5,006
5,606
 5,835
 5,495
Allowance for credit losses(201) (179) (133)(370) (201) (179)
Write-down of lease residual values(2) (9) (16)
Total finance receivables, net$40,424
 $37,956
 $35,904
$39,554
 $40,424
 $37,956
Investment in operating leases, net$32,606
 $31,817
 $31,310
$33,843
 $32,606
 $31,817
Total assets$75,964
 $72,626
 $69,854
$77,256
 $75,964
 $72,626
Debt:          
Commercial paper$5,755
 $5,167
 $4,462
$5,490
 $5,755
 $5,167
Related party debt749
 1,085
 1,201
533
 749
 1,085
Bank loans4,962
 5,419
 5,883
4,938
 4,962
 5,419
Medium term note programs25,984
 24,207
 23,523
26,157
 25,984
 24,207
Other debt3,514
 3,250
 2,736
3,266
 3,514
 3,250
Secured debt8,790
 8,733
 8,422
9,748
 8,790
 8,733
Total debt$49,754
 $47,861
 $46,227
$50,132
 $49,754
 $47,861
Total shareholder’s equity (2)
$16,336
 $15,730
 $12,043
Total shareholder’s equity (4)
$16,586
 $16,336
 $15,730
As of or for the years ended March 31,As of or for the years ended March 31,
2019 2018 20172020 2019 2018
Other Key Consolidated Financial Data          
Ratio of debt to shareholder’s equity3.05x 3.04x 3.84x3.02x 3.05x 3.04x

(1)
The change in presentation of lessor costs resulting from lessor accounting changes that were adopted on April 1, 2019 contributed to the increase in leased vehicle expenses in the fiscal year ended March 31, 2020. For additional information regarding leases, see Note 1—Summary of Business and Significant Accounting Policies of Notes to Consolidated Financial Statements.
(2)The enactment of the Tax Cuts and Jobs Act on December 22, 2017 resulted in income tax benefit recognized for fiscal year ended March 31, 2018.
(3)Net of unearned interest, fees and subsidy income, and deferred origination costs.
(2)(4)Excludes noncontrolling interest in subsidiary.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products and maintain customer and dealer satisfaction and loyalty. To deliver this support effectively, we seek to maintain competitive cost of funds, efficient operations, and effective risk and compliance management. The primary factors influencing our results of operations, cash flows, and financial condition include the volume of Honda and Acura sales and the portion of those sales that we finance, our cost of funds, competition from other financial institutions, consumer credit defaults, and used motor vehicle prices.
A substantial portion of our consumer financing business is acquired through incentive financing programs sponsored by AHM and HCI. The volume of these incentive financing programs and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI’s marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. Our consumer financing acquisition volumes are substantially dependent on the extent to which incentive-financingincentive financing programs are offered. Increases in incentive financing programs generally increase our financing penetration rates, which typically results in increased financing acquisition volumes for us. The amount of subsidy payments we receive from AHM and HCI is dependent on the terms of the incentive financing programs and the interest rate environment. Subsidy payments are received upon acquisition and recognized in revenue throughout the life of the loan or lease; therefore, a significant change in the level of incentive financing programs in a fiscal period typically only has a limited impact on our results of operations for that period. The amount of subsidy income we recognize in a fiscal period is dependent on the cumulative level of subsidized contracts outstanding that were acquired through incentive financing programs.
We seek to maintain high quality consumer and dealer account portfolios, which we support with strong underwriting standards, risk-based pricing, and effective collection practices. Our cost of funds is facilitated by the diversity of our funding sources, and effective interest rate and foreign currency exchange risk management. We manage expenses to support our profitability, including adjusting staffing needs based upon our business volumes and centralizing certain functions. Additionally, we use risk and compliance management practices to optimize credit and residual value risk levels and maintain compliance with our pricing, underwriting and servicing policies at the United States, Canadian, state and provincial levels.
In our business operations, we incur costs related to funding, credit loss, residual value loss, and general and administrative expenses, among other expenses.
We analyze our operations in two business segments defined by geography: the United States and Canada. We measure the performance of our United States and Canada segments on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, see Note 15—Segment Information of Notes to Consolidated Financial Statements. The following tables and the related discussion are presented based on our geographically segmented consolidated financial statements.
References in this report to our "fiscal year 2021", “fiscal year 2020” and “fiscal year 2019” and “fiscal year 2018” refer to our fiscal year ending March 31, 2021, fiscal year ended March 31, 2020 and fiscal year ended March 31, 2019, respectively.

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COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a global pandemic. Extraordinary governmental measures were enacted in efforts to slow down and control the spread of COVID-19 including travel bans and border closings, shelter-in-place orders, closures of non-essential businesses and social distancing requirements. These restrictions, along with the related changes in consumer behaviors, have resulted in an economic slowdown and a significant increase in unemployment in the United States and Canada.
We have modified certain business practices, including remote work arrangements, and we may take further action as may be required by government authorities, or that we determine are in the best interest of our employees, customers and dealers. As of the date of this report, our remote work arrangements have not caused material adverse disruptions to our business operations or financial reporting functions. We also implemented temporary furloughs and salary reductions in an effort to reduce expenses.
To assist our existing retail loan and lease customers who may have been impacted by COVID-19, we granted payment deferrals to those customers who requested assistance beginning in mid-March 2020. The deferral period is up to a maximum of 3 months in the United States and 4 months in Canada, generally from the date the customer was initially granted the deferral. Interest on retail loans continues to accrue during the deferral period. Through the end of May 2020, approximately 9% of our retail loans and approximately 11% of our retail leases have been granted payment deferrals. The highest volume of payment deferrals were granted during the month of April 2020. We plan to continue offering payment deferrals for those customers who request them through the end of June 2020. Although these payment deferrals will result in delays in collections, customers who are taking advantage of the deferrals are not considered delinquent during such deferral periods and therefore are not reflected in our delinquency measures as of March 31, 2020. It is expected that some customers will not be able to make their contractual payments after the deferral period and will ultimately default. We also had a temporary moratorium on involuntary repossessions starting mid-March but have since resumed repossessing vehicles in June 2020 in certain states. Delinquencies, repossessions, and charge-offs on retail loans and realized losses on early terminations of operating leases are expected to begin rising in the first and second quarters of fiscal year ended2021 as the payment deferrals expire. We increased our allowance for credit losses and estimated early termination losses on operating leases significantly as of March 31, 2018, respectively.2020 to reflect the current estimated impact of COVID-19.
Many Honda and Acura dealerships temporarily suspended their sales operations beginning in mid-March. To help support the dealers during this period of disruption to their operations, beginning in March 2020, we granted deferrals of interest payments on floorplans and principal payments on commercial loans generally for a period of 3 months. For the majority of dealers who were granted deferrals, the deferral period will expire in June 2020. Interest continues to accrue during the deferral period.
The suspension of sales operations at Honda and Acura dealerships and the decline in consumer demand had a significant impact on the sale of Honda and Acura vehicles starting in mid-March 2020. As a result, our consumer financing acquisition volumes also declined significantly. As a general indicator of the magnitude of the decline, consumer financing acquisition volumes was approximately 35% lower during the first two months of fiscal year 2021 as compared to the same period in fiscal year 2020. The decline in acquisition volumes was the most severe during April 2020 but improved in May 2020 as most dealerships resumed their sales operations. Month-over-month, overall consumer financing acquisition volumes increased by approximately 90% during May 2020 as compared to April 2020 primarily due to increased acquisition of new auto retail loans.
Sales of returned vehicles were limited during April 2020 as most physical auctions temporarily suspended operations. In early May 2020, physical auctions resumed under limited capacity and sales volumes have increased steadily since then. We expect used vehicle prices to be negatively impacted in the near term. Sustained declines in estimated used vehicle prices may result in a significant increase in depreciation expense over the remaining lease terms and, depending on the severity of the decline, potential impairment charges.
The COVID-19 pandemic has also led to disruption and volatility in the global capital markets, which has and may continue to increase our cost of capital and adversely affect our ability to access the capital markets. To improve our liquidity position for potential disruptions in funding sources, we increased our cash balances in part through additional term loans in March 2020 and a medium-term note issuance in April 2020.
The near-and-long term impact of COVID-19 to our business remains highly uncertain and cannot be accurately predicted at this time. Although some of the initial governmental measures that were enacted to control the spread of COVID-19 have begun to be scaled back, a resurgence in the spread of COVID-19 may result in the reimplementation of certain restrictions. See Item 1A, Risk Factors in this Annual Report on Form 10-K for additional information.

23


Results of Operations
The following table presents our income before income taxes:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Income before income taxes:          
United States segment$1,396
 $1,194
 $991
$1,157
 $1,396
 $1,194
Canada segment273
 286
 199
276
 273
 286
Total income before income taxes$1,669
 $1,480
 $1,190
$1,433
 $1,669
 $1,480

Comparison of Fiscal Years Ended March 31, 20192020 and 20182019
Our consolidated income before income taxes was $1,433 million in fiscal year 2020 compared to $1,669 million in fiscal year 2019 compared to $1,480 million in fiscal year 2018.2019. This increasedecrease of $189$236 million, or 13%14%, was due to the following:following differences:
Years ended March 31,Years ended March 31,
2019 2018 Difference % Change2020 2019 Difference % Change
              
(U.S. dollars in millions)  (U.S. dollars in millions)  
Net revenues:              
Direct financing leases$4
 $13
 $(9) (69%)
Retail1,610
 1,369
 241
 18 %$1,737
 $1,614
 $123
 8 %
Dealer232
 175
 57
 33 %222
 232
 (10) (4)%
Operating leases, net of depreciation1,733
 1,409
 324
 23 %
Operating leases, net of leased vehicle expenses2,056
 1,864
 192
 10 %
Interest expense(1,190) (897) (293) 33 %(1,241) (1,190) (51) 4 %
Gain on disposition of lease vehicles131
 93
 38
 41 %
Other income71
 56
 15
 27%88
 71
 17
 24 %
Total net revenues2,591
 2,218
 373
 17 %2,862
 2,591
 271
 10 %
Expenses:              
General and administrative expenses456
 439
 17
 4 %498
 456
 42
 9 %
Provision for credit losses249
 244
 5
 2 %402
 249
 153
 61 %
Impairment loss on operating leases14
 
 14
 n/m

 14
 (14) n/m
Early termination loss on operating leases101
 108
 (7) (6)%331
 101
 230
 228 %
(Gain)/Loss on derivative instruments509
 (550) 1,059
 (193%)305
 509
 (204) (40)%
(Gain)/Loss on foreign currency revaluation of debt(407) 494
 (901) (182%)(107) (407) 300
 (74)%
Other
 3
 (3) (100%)
Total expenses922
 738
 184
 25%1,429
 922
 507
 55 %
Total income before income taxes$1,669
 $1,480
 $189
 13 %$1,433
 $1,669
 $(236) (14)%
n/m= not meaningful


24


Segment Results—Comparison of Fiscal Years Ended March 31, 20192020 and 20182019
Results of operations for the United States segment and the Canada segment are summarized below:
United States Segment Canada Segment ConsolidatedUnited States Segment Canada Segment Consolidated
Years ended March 31, Years ended March 31, Years ended March 31,Years ended March 31, Years ended March 31, Years ended March 31,
2019 2018 2017 2019 2018 2017 2019 2018 20172020 2019 2018 2020 2019 2018 2020 2019 2018
                                  
(U.S. dollars in millions)(U.S. dollars in millions)
Revenues:                                  
Direct financing leases$
 $
 $
 $4
 $13
 $34
 $4
 $13
 $34
Retail1,406
 1,181
 1,030
 204
 188
 158
 1,610
 1,369
 1,188
$1,533
 $1,406
 $1,181
 $204
 $208
 $201
 $1,737
 $1,614
 $1,382
Dealer211
 158
 133
 21
 17
 14
 232
 175
 147
198
 211
 158
 24
 21
 17
 222
 232
 175
Operating leases6,001
 5,815
 5,547
 1,252
 1,075
 786
 7,253
 6,890
 6,333
6,402
 6,001
 5,815
 1,347
 1,252
 1,075
 7,749
 7,253
 6,890
Total revenues7,618
 7,154
 6,710
 1,481
 1,293
 992
 9,099
 8,447
 7,702
8,133
 7,618
 7,154
 1,575
 1,481
 1,293
 9,708
 9,099
 8,447
Depreciation on operating leases4,520
 4,598
 4,403
 1,000
 883
 653
 5,520
 5,481
 5,056
Leased vehicle expenses4,667
 4,420
 4,532
 1,026
 969
 859
 5,693
 5,389
 5,391
Interest expense1,015
 770
 638
 175
 127
 90
 1,190
 897
 728
1,063
 1,015
 770
 178
 175
 127
 1,241
 1,190
 897
Net revenues2,083
 1,786
 1,669
 306
 283
 249
 2,389
 2,069
 1,918
2,403
 2,183
 1,852
 371
 337
 307
 2,774
 2,520
 2,159
Gain on disposition of lease
vehicles
100
 66
 24
 31
 27
 19
 131
 93
 43
Other income63
 50
 100
 8
 6
 5
 71
 56
 105
77
 63
 50
 11
 8
 6
 88
 71
 56
Total net revenues2,246
 1,902
 1,793
 345
 316
 273
 2,591
 2,218
 2,066
2,480
 2,246
 1,902
 382
 345
 313
 2,862
 2,591
 2,215
Expenses:            
 
 
            
 
 
General and administrative
expenses
403
 384
 383
 53
 55
 51
 456
 439
 434
439
 403
 384
 59
 53
 55
 498
 456
 439
Provision for credit losses242
 239
 199
 7
 5
 11
 249
 244
 210
393
 242
 239
 9
 7
 5
 402
 249
 244
Impairment loss on operating leases14
 
 
 
 
 
 14
 
 

 14
 
 
 
 
 
 14
 
Early termination loss on
operating leases
98
 105
 67
 3
 3
 6
 101
 108
 73
327
 98
 105
 4
 3
 3
 331
 101
 108
Loss on lease residual values
 
 
 
 3
 15
 
 3
 15
(Gain)/Loss on derivative
instruments
500
 (514) 324
 9
 (36) (9) 509
 (550) 315
271
 500
 (514) 34
 9
 (36) 305
 509
 (550)
(Gain)/Loss on foreign
currency revaluation of
debt
(407) 494
 (171) 
 
 
 (407) 494
 (171)(107) (407) 494
 
 
 
 (107) (407) 494
Income before income taxes$1,396
 $1,194
 $991
 $273
 $286
 $199
 $1,669
 $1,480
 $1,190
$1,157
 $1,396
 $1,194
 $276
 $273
 $286
 $1,433
 $1,669
 $1,480
Revenues
Revenue from retail loans in the United States segment increased by $225$127 million, or 19%9%, during fiscal year 20192020 compared to fiscal year 2018.2019. The increase in revenue was attributable to higher yields due to the rising interest rate environmentaverage outstanding balances and higher average outstanding balances.yields. Revenue from retail loans in the Canada segment, increasedwhich includes the remaining balance of direct financing leases, decreased by $16$4 million, or 9%2%, during fiscal year 20192020 compared to fiscal year 2018.2019. The increasedecrease in revenue was attributable to higher yieldsthe decline in direct financing leases due to the rising interest rate environment.runoff.
Operating lease revenue increased by $401 million, or 7%, in the United States segment increasedand by $186$95 million, or 3%8%, in the Canada segment during fiscal year 20192020 compared to fiscal year 2018.2019. The increase was primarily due to higher net revenue on more recently acquired operating lease assets due to the rising interest rate environment. Operating lease revenueincreases in the United States and Canada segment increased by $177 million, or 16%, during fiscal year 2019 compared to fiscal year 2018. The increase wassegments were attributable to higher net revenue on more recently acquired operating lease assets due to the rising interest rate environmentleases and higher average outstanding operating lease assets.
Direct financing lease revenue, which is generated only in Canada, declined by $9 million, or 69%, during fiscal year 2019 compared to fiscal year 2018 due to the run-off of direct financing lease assets.

Revenue from dealer loans in the United States segment increaseddecreased by $53$13 million, or 34%6%, during fiscal year 20192020 compared to fiscal year 2018.2019. The increasedecrease was attributable to higherlower yields due to the rising interest rate environment and higherlower average outstanding balances. Revenue from dealer loans in the Canada segment increased by $4$3 million, or 24%14%, primarily due to higher yields due to the rising interest rate environment.average outstanding balances and higher yields.
Consolidated subsidy income from AHM and HCI sponsored incentive programs increased by $192$6 million or 13%,to $1,639 million during fiscal year 2020 compared to $1,633 million during fiscal year 2019 compared to $1,441 million during fiscal year 2018.2019. The increase was attributableprimarily due to higher average subsidy payments received. As a result of the rising interest rate environment, the average amount of subsidy payments necessary for us to realize market yields on incentive programs has also been rising.
Depreciation on operating leases
Depreciation on operating leases
25


Leased vehicle expenses
Leased vehicle expense increased by $247 million, or 6%, in the United States segment decreasedand by $78$57 million, or 2%6%, in the Canada segment during fiscal year 20192020 compared to fiscal year 2018.2019. The decreaseincreases in the United States and Canada segments were attributable to the increase in depreciation was primarily due to improvements in expected used vehicle values during fiscal year 2019 compared to fiscal year 2018. Depreciation on operating lease assets in the Canada segment increased by $117 million, or 13%,leases due to higher average outstanding operating lease assets.
Operating lease revenue, netassets and the change in presentation of depreciation in the United States segment increased by $264 million, or 22%, during fiscal year 2019 comparedlessor costs resulting from lessor accounting changes that were adopted on April 1, 2019. For additional information regarding leases, see Note 1Summary of Business and Significant Accounting Policies of Notes to fiscal year 2018. The increase in operating lease revenue, net of depreciation was attributable to higher net revenue on more recently acquired operating lease assets due to the rising interest rate environment and decrease in depreciation due to improvements in expected used vehicle values. Operating lease revenue, net of depreciation in the Canada segment increased by $60 million, or 31%, during fiscal year 2019 compared to fiscal year 2018. The increase in operating lease revenue, net of depreciation, was attributable to higher net revenue on more recently acquired operating lease assets due to the rising interest rate environment and higher average outstanding operating lease assets.Consolidated Financial Statements.
Interest expense
Interest expense in the United States segment increased by $245$48 million, or 32%5%, during fiscal year 20192020 compared to fiscal year 2018.2019. The increase was attributable to higher average interest rates and an increase in average outstanding debt.debt and higher average interest rates. Interest expense in the Canada segment increased by $48$3 million, or 38%2%, primarily due to higher average interest rates. See “—Liquidity and Capital Resources” below for more information.
Gain on disposition of lease vehicles
The gain on disposition of lease vehicles in the United States segment increased by $34 million, or 52%, during fiscal year 2019 compared to fiscal year 2018. The gain on disposition of lease vehicles in the Canada segment increased by $4 million, or 15%. The increases in gains in both segments were primarily the result of higher volume of units with more favorable disposition proceeds than the assumptions that were reflected in their estimated residual values. See “—Financial Condition—Lease Residual Value Risk” below for more information.
Provision for credit losses
The provision for credit losses in the United States segment increased by $3$151 million, or 1%62%, during fiscal year 20192020 compared to fiscal year 2018.2019. The increase in the provision was primarily dueattributable to the riseestimated impact of COVID-19 and the expected increase in the provision for past due operating lease rental payments and andefaults on retail loans. The increase in the provision was partially offset by the change to the income statement presentation for impaired dealer loans. uncollectible operating lease receivables from the lessor accounting change that was adopted on April 1, 2019. For additional information regarding leases, see Note 1Summary of Business and Significant Accounting Policies of Notes to Consolidated Financial Statements. The provision for credit losses in the Canada segment increased by $2 million, or 40%29%, during fiscal year 20192020 compared to fiscal year 2018. During fiscal year 2018,2019 due to the reduction in the allowance for credit losses in the Canada segment in order to reflect improving credit performance resulted in a lower provision for credit losses. During fiscal year 2019, there was a slight increase in the allowance for credit losses.estimated impact of COVID-19. See “—COVID-19 Pandemic" above and��—Financial Condition—Credit Risk” below for more information.
Impairment loss on operating leases
No impairment losses on operating leases due to declines in estimated residual values were recognized during fiscal year 2020. Impairment loss on operating leases of $14 million was recognized in the United States segment during fiscal year 2019 due to lower estimated residual valuevalues of a certain modelsmodel of leased vehicles. No impairment losses due to declines in estimated residual values were recognized during the fiscal year 2018. See “—Financial Condition—Lease Residual Value Risk” below for more information.

Early termination loss on operating leases
Early termination losses on operating leases in the United States segment decreasedincreased by $7$229 million, or 7%234%, during fiscal year 20192020 compared to fiscal year 20182019 primarily due to a smaller increase inthe estimated early termination losses.impact of COVID-19. Early termination losses on operating leases in the Canada segment were flatincreased by $1 million during fiscal year 20192020 compared to fiscal year 2018.2019. See—COVID-19 Pandemic" above and—Financial Condition—Credit Risk” below for more information.
Loss on lease residual values
Loss on lease residual values in the Canada segment decreased by $3 million, or 100%, during fiscal year 2019 compared to fiscal year 2018, primarily due to the run-off of direct financing lease assets. See “—Financial Condition—Lease Residual Value Risk” below for more information.
Gain/loss on derivative instruments
In the United States segment, we recognized a loss on derivative instruments of $271 million during fiscal year 2020 compared to a loss of $500 million during fiscal year 2019 compared to a gain of $514 million during fiscal year 2018.2019. The loss in fiscal year 20192020 was attributable to a losslosses on cross currency swaps of $486 million and pay fixed interest rate swaps of $161$676 million and cross currency swaps of $177 million, partially offset by gains on pay float interest rate swaps of $147$582 million. The loss on cross currency swaps during fiscal year 2019 was primarily attributable to the U.S. dollar strengthening against the Euro and Sterling during the period. The losses on pay fixed interest rate swaps and gains on pay float interest rate swaps during fiscal year 20192020 were primarily due to declines in applicable swap rates during the period. The losses on cross currency swaps during fiscal year 2020 were attributable to the U.S. dollar strengthening against the Euro and Sterling and the effect of unwinding the discount on swap valuations during the period. In the Canada segment, we recognized a loss on derivative instruments of $34 million during fiscal year 2020 compared to a loss of $9 million during fiscal year 2019 compared to a gain of $36 million during fiscal year 2018.2019. The losses during fiscal year 20192020 were due to declines in applicable swap rates during the period. See “—Derivatives” below for more information.
Gain/loss on foreign currency revaluation of debt
In the United States segment, we recognized a gain on the revaluation of foreign currency denominated debt of $107 million during fiscal year 2020 compared to a gain of $407 million during fiscal year 2019 compared to a loss of $494 million during fiscal year 2018.2019. The gain during fiscal year 20192020 was primarily due to the U.S. dollar strengthening against the Euro and Sterling during the period.

26


Income tax expense
Our consolidated effective tax rate was 29.6% for fiscal year 2020 and 25.6% for fiscal year 2019 and (177.6)% for fiscal year 2018.2019. The increase in the effective tax rate for fiscal year 20192020 was primarily due to the impactnet effect of a reduction in the newbenefit of tax credits generated in fiscal year 2020, a non-recurring tax benefit in fiscal year 2019 related to U.S. federal income tax rate and thereform Transition Tax under the Tax Cutsadjustments, an increase in uncertain tax positions, and Jobs Act (Tax Act). a decrease in state taxes due to a change in estimated state tax rates.For additional information regarding income taxes, see Note 7—Income Taxes of Notes to Consolidated Financial Statements.
The U.S. federal tax rate of 31.55% in fiscal year ended March 31, 2018 is a result of the 35% tax rate under prior U.S. federal tax law and the current 21% tax rate, each prorated based on the number of days prior to and subsequent to the January 1, 2018 effective date of the Tax Act.



Financial Condition
Consumer Financing
Consumer Financing Acquisition Volumes
The following table summarizes the number of retail loans and leases we acquired and the number of such loans and leases acquired through incentive financing programs sponsored by AHM and HCI:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
Acquired 
Sponsored (2)
 Acquired 
Sponsored (2)
 Acquired 
Sponsored (2)
Acquired 
Sponsored (2)
 Acquired 
Sponsored (2)
 Acquired 
Sponsored (2)
                      
(Units (1) in thousands)
(Units (1) in thousands)
United States Segment                      
Retail loans:                      
New auto486
 332
 477
 307
 464
 325
414
 229
 486
 332
 477
 307
Used auto123
 26
 104
 26
 88
 9
125
 21
 123
 26
 104
 26
Motorcycle68
 4
 72
 11
 74
 11
Other1
 
 1
 
 1
 
Motorcycle and other70
 1
 69
 4
 73
 11
Total retail loans678
 362
 654
 344
 627
 345
609
 251
 678
 362
 654
 344
Leases495
 438
 452
 361
 514
 470
549
 436
 495
 438
 452
 361
Canada Segment                      
Retail loans:                      
New auto63
 61
 70
 68
 67
 63
58
 51
 63
 61
 70
 68
Used auto5
 1
 9
 6
 10
 6
5
 1
 5
 1
 9
 6
Motorcycle7
 6
 8
 7
 6
 4
Other1
 
 
 
 1
 
Motorcycle and other8
 7
 8
 6
 8
 7
Total retail loans76
 68
 87
 81
 84
 73
71
 59
 76
 68
 87
 81
Leases92
 91
 85
 84
 81
 80
88
 83
 92
 91
 85
 84
Consolidated                      
Retail loans:                      
New auto549
 393
 547
 375
 531
 388
472
 280
 549
 393
 547
 375
Used auto128
 27
 113
 32
 98
 15
130
 22
 128
 27
 113
 32
Motorcycle75
 10
 80
 18
 80
 15
Other2
 
 1
 
 2
 
Motorcycle and other78
 8
 77
 10
 81
 18
Total retail loans754
 430
 741
 425
 711
 418
680
 310
 754
 430
 741
 425
Leases587
 529
 537
 445
 595
 550
637
 519
 587
 529
 537
 445
_______________________
(1)A unit represents one retail loan or lease contract, as noted, that was originated in the United States and acquired by AHFC or its subsidiaries, or that was originated in Canada and acquired by HCFI, in each case during the period shown.
(2)Represents the number of retail loans and leases acquired through incentive financing programs sponsored by AHM and/or HCI and only those contracts with subsidy payments. Excludes contracts where contractual rates met or exceeded AHFC’s yield requirements and subsidy payments were not required.

27


Consumer Financing Penetration Rates
The following table summarizes the percentage of AHM and/or HCI sales of new automobiles and motorcycles that were financed with either with retail loans or leases that we acquired:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
United States Segment          
New auto61% 57% 59%63% 61% 57%
Motorcycle36% 38% 39%34% 36% 38%
Canada Segment          
New auto79% 78% 77%83% 79% 78%
Motorcycle29% 32% 24%30% 29% 32%
Consolidated          
New auto63% 59% 61%65% 63% 59%
Motorcycle35% 37% 37%33% 35% 37%

28


Consumer Financing Asset Balances
The following table summarizes our outstanding retail loan and lease asset balances and units:
March 31, March 31,March 31, March 31,
2019 2018 2017 2019 2018 20172020 2019 2018 2020 2019 2018
                      
(U.S. dollars in millions) 
(Units (1) in thousands)
(U.S. dollars in millions) 
(Units (1) in thousands)
United States Segment                      
Retail loans:                      
New auto$25,201
 $23,700
 $22,837
 1,569
 1,590
 1,610
$24,353
 $25,201
 $23,700
 1,510
 1,569
 1,590
Used auto4,522
 3,685
 3,154
 318
 268
 234
4,999
 4,522
 3,685
 356
 318
 268
Motorcycle1,055
 1,028
 993
 190
 193
 191
Other49
 46
 51
 3
 4
 4
Motorcycle and other1,145
 1,104
 1,074
 192
 193
 197
Total retail loans$30,827
 $28,459
 $27,035
 2,080
 2,055
 2,039
$30,497
 $30,827
 $28,459
 2,058
 2,080
 2,055
Investment in operating leases$28,809
 $27,493
 $27,040
 1,318
 1,300
 1,301
           
Securitized retail loans (2)
$7,896
 $7,633
 $7,748
 765
 691
 690
$8,977
 $7,896
 $7,633
 703
 665
 691
Investment in operating leases$27,493
 $27,040
 $27,380
 1,300
 1,301
 1,294
                      
Canada Segment                      
Retail loans:                      
New auto$3,430
 $3,463
 $3,067
 259
 245
 219
$3,195
 $3,458
 $3,604
 258
 263
 260
Used auto226
 309
 345
 29
 36
 44
178
 226
 309
 24
 29
 36
Motorcycle83
 86
 73
 20
 19
 16
Other3
 3
 3
 1
 2
 2
Motorcycle and other84
 86
 89
 20
 21
 21
Total retail loans$3,742
 $3,861
 $3,488
 309
 302
 281
$3,457
 $3,770
 $4,002
 302
 313
 317
Investment in operating leases$5,034
 $5,113
 $4,777
 296
 289
 259
           
Securitized retail loans (2)
$1,177
 $1,262
 $764
 93
 89
 59
$668
 $1,177
 $1,262
 58
 92
 89
Direct financing leases$28
 $141
 $375
 4
 15
 34
Investment in operating leases$5,113
 $4,777
 $3,930
 289
 259
 212
Securitized investment in operating leases (2)
$493
 $
 $
 24
 
 
                      
Consolidated                      
Retail loans:                      
New auto$28,631
 $27,163
 $25,904
 1,828
 1,835
 1,829
$27,548
 $28,659
 $27,304
 1,768
 1,832
 1,850
Used auto4,748
 3,994
 3,499
 347
 304
 278
5,177
 4,748
 3,994
 380
 347
 304
Motorcycle1,138
 1,114
 1,066
 210
 212
 207
Other52
 49
 54
 4
 6
 6
Motorcycle and other1,229
 1,190
 1,163
 212
 214
 218
Total retail loans$34,569
 $32,320
 $30,523
 2,389
 2,357
 2,320
$33,954
 $34,597
 $32,461
 2,360
 2,393
 2,372
Investment in operating leases$33,843
 $32,606
 $31,817
 1,614
 1,589
 1,560
           
Securitized retail loans (2)
$9,073
 $8,895
 $8,512
 858
 780
 749
$9,645
 $9,073
 $8,895
 761
 757
 780
Direct financing leases$28
 $141

$375
 4
 15
 34
Investment in operating leases$32,606
 $31,817
 $31,310
 1,589
 1,560
 1,506
Securitized investment in operating leases (2)
$493
 $
 $
 24
 
 
_______________________
(1)A unit represents one retail loan or lease contract, as noted, that was outstanding as of the date shown.
(2)Securitized retail loans and investments in operating leases represent the portion of total retail loansmanaged assets that have been sold in securitization transactions but continue to be recognized on our balance sheet. SecuritizedThe outstanding securitized retail loansloan units as of March 31, 2019 as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 was incorrect due to a clerical error and the corrected units are included in the amounts for total retail loans.presented above.

29


In the United States segment, retail loan acquisition volumes increaseddecreased by 4%10% during fiscal year 20192020 compared to fiscal year 20182019 primarily due to the increasedecline in non-sponsored used and sponsored new auto loan acquisition volumes. Lease acquisition volumes increased by 10%11% during fiscal year 20192020 compared to fiscal year 20182019 primarily due to the increase in incentivenon-sponsored program volumes.
In the Canada segment, retail loan acquisition volumes decreased by 13%7% during fiscal year 20192020 compared to fiscal year 20182019 primarily due to the decline in retailsponsored new auto loan incentiveacquisition volumes. Lease acquisition volumes increaseddecreased by 8%4% during fiscal year 20192020 compared to fiscal year 20182019 primarily due to the increasedecrease in incentivesponsored program volumes. Outstanding directBeginning in mid-March 2020, consumer financing lease assets continuedacquisition volumes declined significantly due to decline and operating lease assets continued to increase during fiscal year 2019 as the resultimpact of our remaining direct financing leases maturing and all newly acquired leases being classified as operating leases.COVID-19. See "—COVID-19 Pandemic" above for more information
Dealer Financing
Wholesale Flooring Financing Penetration Rates
The following table summarizes the number of dealerships with wholesale flooring financing agreements as a percentage of total Honda and Acura dealerships in the United States and/or Canada, as applicable:
March 31,March 31,
2019 2018 20172020 2019 2018
United States Segment          
Automobile30% 28% 28%29% 30% 28%
Motorcycle97% 98% 97%97% 97% 98%
Other20% 21% 21%16% 20% 21%
          
Canada Segment          
Automobile35% 36% 35%36% 35% 36%
Motorcycle95% 95% 95%96% 95% 95%
Other95% 95% 95%93% 95% 95%
          
Consolidated          
Automobile31% 30% 29%30% 31% 30%
Motorcycle97% 97% 97%97% 97% 97%
Other22% 23% 24%19% 22% 23%
Wholesale Flooring Financing Percentage of Sales
The following table summarizes the percentage of AHM unit sales in the United States and/or HCI unit sales in Canada, as applicable, that we financed through wholesale flooring loans with dealerships:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
United States Segment          
Automobile27% 28% 27%26% 27% 28%
Motorcycle97% 98% 97%98% 97% 98%
Other7% 8% 7%6% 7% 8%
Canada Segment          
Automobile32% 31% 31%32% 32% 31%
Motorcycle92% 94% 96%94% 92% 94%
Other96% 95% 98%96% 96% 95%
Consolidated          
Automobile27% 28% 27%27% 27% 28%
Motorcycle96% 97% 97%97% 96% 97%
Other9% 10% 10%9% 9% 10%

30


Dealer Financing Asset Balances
The following table summarizes our outstanding dealer financing asset balances and units:
March 31, March 31,March 31, March 31,
2019 2018 2017 2019 2018 20172020 2019 2018 2020 2019 2018
                      
(U.S. dollars in millions) 
(Units (1) in thousands)
(U.S. dollars in millions) 
(Units (1) in thousands)
United States Segment                      
Wholesale flooring loans:                      
Automobile3,308
 3,075
 2,823
 121
 113
 111
$3,049
 $3,308
 $3,075
 109
 121
 113
Motorcycle750
 738
 684
 101
 100
 93
760
 750
 738
 96
 101
 100
Other59
 60
 64
 63
 67
 73
55
 59
 60
 56
 63
 67
Total wholesale flooring loans4,117
 3,873
 3,571
 285
 280
 277
$3,864
 $4,117
 $3,873
 261
 285
 280
Commercial loans1,084
 978
 841
      $1,020
 $1,084
 $978
      
                      
Canada Segment                      
Wholesale flooring loans:                      
Automobile441
 452
 414
 17
 18
 18
$547
 $441
 $452
 21
 17
 18
Motorcycle95
 98
 86
 13
 13
 13
91
 95
 98
 13
 13
 13
Other25
 29
 29
 28
 31
 32
24
 25
 29
 27
 28
 31
Total wholesale flooring loans561
 579
 529
 58
 62
 63
$662
 $561
 $579
 61
 58
 62
Commercial loans65
 65
 65
      $54
 $65
 $65
      
                      
Consolidated                      
Wholesale flooring loans:                      
Automobile3,749
 3,527
 3,237
 138
 131
 129
$3,596
 $3,749
 $3,527
 130
 138
 131
Motorcycle845
 836
 770
 114
 113
 106
851
 845
 836
 109
 114
 113
Other84
 89
 93
 91
 98
 105
79
 84
 89
 83
 91
 98
Total wholesale flooring loans4,678
 4,452
 4,100
 343
 342
 340
$4,526
 $4,678
 $4,452
 322
 343
 342
Commercial loans1,149
 1,043
 906
      $1,074
 $1,149
 $1,043
      
________________________
(1)A unit represents one automobile, motorcycle, power equipment, or marine engine, as applicable, financed through a wholesale flooring loan that was outstanding as of the date shown.
Credit Risk
Credit losses are an expected cost of extending credit. The majority of our credit risk is in consumer financing and to a lesser extent in dealer financing. Credit risk of our portfolio of consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. We manage our exposure to credit risk in retail loans and direct financing leases by monitoring and adjusting our underwriting standards, which affect the level of credit risk that we assume, pricing contracts for expected losses, focusing collection efforts to minimize losses, and ongoing reviews of the financial condition of dealers.
We are also exposed to credit risk on our portfolio of operating lease assets. We expect a portion of our operating leases to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on our operating leases and our management of the risk are similar to that of our retail loans and direct financing leases.consumer finance receivables.

31


Credit risk on dealer loans is affected primarily by the financial strength of the dealers within the portfolio, the value of collateral securing the financings, and economic and market factors that could affect the creditworthiness of dealers. We manage our exposure to credit risk in dealer financing by performing comprehensive reviews of dealers prior to establishing financing arrangements and monitoring the payment performance and creditworthiness of these dealers on an ongoing basis. In the event of default by a dealer, we seek all available legal remedies pursuant to related dealer agreements, guarantees, security interests on collateral, or liens on dealership assets. Additionally, we have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of itstheir respective wholesale flooring agreement.agreements.
An allowance for credit losses is maintained for management’s estimate of probable losses incurred on finance receivables. We also maintain an estimate for early termination losses on operating lease assets due to lessee defaults and an allowance for credit losses for estimated probable losses incurred on past due operating lease rental payments.
Additional information regarding credit losses is provided in the discussion of “—Critical Accounting Policies—Credit Losses” below.
The following table presents information with respect to our allowance for credit losses and credit loss experience of our finance receivables and losses related to lessee defaults on our operating leases:
 As of or for the years ended March 31,
 2020 2019 2018
      
 (U.S. dollars in millions)
United States Segment     
Finance receivables:     
Allowance for credit losses at beginning of period$194
 $173
 $124
Provision for credit losses393
 203
 209
Charge-offs, net of recoveries(228) (182) (160)
Allowance for credit losses at end of period$359
 $194
 $173
Allowance as a percentage of ending receivable balance (1)
1.01% 0.53% 0.51%
Charge-offs as a percentage of average receivable balance (1)
0.63% 0.51% 0.49%
Delinquencies (60 or more days past due):     
Delinquent amount (2)
$91
 $104
 $56
As a percentage of ending receivable balance (1), (2)
0.25% 0.28% 0.17%
Operating leases:     
Early termination loss on operating leases$327
 $98
 $105
Revenue reduction / provision for uncollectible operating lease receivables (3)
27
 39
 30
Canada Segment     
Finance receivables:     
Allowance for credit losses at beginning of period$7
 $6
 $9
Provision for credit losses9
 6
 4
Charge-offs, net of recoveries(5) (5) (7)
Effect of translation adjustment
 
 
Allowance for credit losses at end of period$11
 $7
 $6
Allowance as a percentage of ending receivable balance (1)
0.22% 0.14% 0.13%
Charge-offs as a percentage of average receivable balance (1)
0.12% 0.12% 0.16%
Delinquencies (60 or more days past due):     
Delinquent amount (2)
$3
 $4
 $8
As a percentage of ending receivable balance (1), (2)
0.08% 0.09% 0.16%
Operating leases:     
Early termination loss on operating leases$4
 $3
 $3
Revenue reduction / provision for uncollectible operating lease receivables (3)
1
 1
 1

32


As of or for the years ended March 31,
2019 2018 2017
     
(U.S. dollars in millions)
United States Segment     
Finance receivables:     
Allowance for credit losses at beginning of period$173
 $124
 $83
Provision for credit losses203
 209
 177
Charge-offs, net of recoveries(182) (160) (136)
Allowance for credit losses at end of period$194
 $173
 $124
Allowance as a percentage of ending receivable balance (1)
0.53% 0.51% 0.39%
Charge-offs as a percentage of average receivable balance (1)
0.51% 0.49% 0.43%
Delinquencies (60 or more days past due):     
Delinquent amount (2)
$104
 $56
 $42
As a percentage of ending receivable balance (1), (2)
0.28% 0.17% 0.13%
Operating leases:     
Early termination loss on operating leases$98
 $105
 $67
Provision for past due operating lease rental payments (3)
39
 30
 22
Canada Segment     
Finance receivables:     
Allowance for credit losses at beginning of period$6
 $9
 $10
Provision for credit losses6
 4
 10
Charge-offs, net of recoveries(5) (7) (11)
Effect of translation adjustment
 
 
Allowance for credit losses at end of period$7
 $6
 $9
Allowance as a percentage of ending receivable balance (1)
0.14% 0.13% 0.20%
Charge-offs as a percentage of average receivable balance (1)
0.12% 0.16% 0.24%
Delinquencies (60 or more days past due):     
Delinquent amount (2)
$4
 $8
 $7
As a percentage of ending receivable balance (1), (2)
0.09% 0.16% 0.15%
Operating leases:     
Early termination loss on operating leases$3
 $3
 $6
Provision for past due operating lease rental payments (3)
1
 1
 1
Consolidated          
Finance receivables:          
Allowance for credit losses at beginning of period$179
 $133
 $93
$201
 $179
 $133
Provision for credit losses209
 213
 187
402
 209
 213
Charge-offs, net of recoveries(187) (167) (147)(233) (187) (167)
Effect of translation adjustment
 
 

 
 
Allowance for credit losses at end of period$201
 $179
 $133
$370
 $201
 $179
Allowance as a percentage of ending receivable balance (1)
0.49% 0.46% 0.36%0.92% 0.49% 0.46%
Charge-offs as a percentage of average receivable balance (1)
0.47% 0.44% 0.41%0.57% 0.47% 0.44%
Delinquencies (60 or more days past due):          
Delinquent amount (2)
$108
 $64
 $49
$94
 $108
 $64
As a percentage of ending receivable balance (1), (2)
0.26% 0.17% 0.13%0.23% 0.26% 0.17%
Operating leases:          
Early termination loss on operating leases$101
 $108
 $73
$331
 $101
 $108
Provision for past due operating lease rental payments (3)
40
 31
 23
Revenue reduction / provision for uncollectible operating lease receivables (3)
28
 40
 31
________________________
(1)Ending and average receivable balances exclude the allowance for credit losses, write-down of lease residual values, unearned subvention income related to our incentive financing programs and deferred origination costs. Average receivable balances are calculated based on the average of each month’s ending receivables balance for that fiscal year.
(2)For the purposes of determining whether a contract is delinquent, payment is generally considered to have been made, in the case of (i) dealer finance receivables,loans, upon receipt of 100% of the payment when due and (ii) consumer finance receivables, upon receipt of 90% of the sum of the current monthly payment plus any overdue monthly payments. Delinquent amounts presented are the aggregated principal balances of delinquent finance receivables. Finance receivables that were granted payment deferrals are not considered delinquent and are therefore excluded from these delinquency measures.
(3)Provisions for past dueuncollectible operating lease rental payments are alsoreceivables were included in total provision for credit losses in our consolidated statements of income.income during fiscal years 2019 and 2018.

In the United States segment, the provision for credit losses on our finance receivables was $393 million during fiscal year 2020 compared to $203 million during fiscal year 2019 compared to $209 million during fiscal year 2018.2019. The declineincrease in the provision for credit losses was dueprimarily attributable to a smaller increase in the estimated impact of COVID-19. The allowance for credit losses forwas increased significantly in the fourth quarter of fiscal year 2020 to reflect higher expected defaults on retail loans during fiscal year 2019 compareddue to fiscal year 2018. Although netthe sharp rise in unemployment. Net charge-offs of retail loans during fiscal year 2019 were higher2020 increased compared to the same period in fiscal year 2018, which continues the trend of increasing charge-offs that we have been experiencing since fiscal year 2016, the rate of increase was lower compared to prior years. The increasing trend in charge-offs was2019, primarily due to the increase in the volume of retail loans with longer terms which typically have higher loan-to-value ratios and as a result, higher loss severities. The increasing trend in charge-offs was also the result of higher charge-off frequencies due to the increase in the volume of retail loans in our lowest credit grade tiertiers and used auto loans. The declineDelinquencies and net charge-offs during fiscal year 2020 were largely unaffected by COVID-19 since the increase in unemployment did not occur until the last weeks of the fiscal year. Delinquencies and charge-offs are expected to rise in the first and second quarters of fiscal year 2021 as the payment deferrals expire. As a result of lessor accounting changes that were adopted on April 1, 2019, allowances for uncollectible operating lease receivables were recognized as a reduction to lease revenue rather than recording the losses through the provision for retail loans was partially offset by an increase in the provision credit losses. See Note 1—Summary of Business and Significant Accounting Policies of Notes to Consolidated Financial Statements for impaired dealer loans of $8 million.additional information. We recognized early termination losses on operating lease assets of $327 million during fiscal year 2020 compared to $98 million during fiscal year 2019 compared to $105 million during fiscal year 2018. Although the actual net losses we realized during fiscal year 2019 continued to2019. The increase compared to prior years, the rate of increase has slowed. As a result, the increasewas primarily due to the estimated early termination losses we recognized during fiscal year 2019 was lower compared to fiscal year 2018. During fiscal year 2019, there was animpact of COVID-19 and the expected increase in the frequency of lessee defaults which was partially offset by lower loss severities on early terminations. The increase in the frequency of lessee defaults contributed to the increase in provision for credit losses on past due rental payments.defaults.
In the Canada segment, the provision for credit losses on our finance receivables was $9 million during fiscal year 2020 compared to $6 million during fiscal year 2019 compared2019. The increase was due to $4 million during fiscal year 2018. During fiscal year 2018, the reduction in the allowance for credit losses in the Canada segment in order to reflect improving credit performance resulted in a lower provision for credit losses. During fiscal year 2019, there was a slight increase in the allowance for credit losses.estimated impact of COVID-19. Early termination losses on operating lease assets was $4 million during fiscal year 2020 compared to $3 million during fiscal year 2019, which was flat compared to fiscal year 2018.2019.

33


Lease Residual Value Risk
Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or for a market based price. Returned lease vehicles that are not purchased by the grounding dealers are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values.
We assess our estimates for end of lease term market values of leased vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends, and market information on new and used vehicles. Our leasing volumes and those ofacross the automotive industry have increased significantly in recent years. As a result, the supply of off-lease vehicles will continue to increase over the next several years, which could negatively impact used vehicle prices. For operating leases, adjustmentsAdjustments to estimated residual values are made on a straight-line basis over the remaining term of the lease and recognized as depreciation expense. For direct financing leases, downward adjustments for declines in estimated residual values deemed other-than-temporary are recognized as a loss on lease residual values in the period in which the estimate changed. Additional information regarding lease residual values is provided in the discussion of “—Critical Accounting PoliciesDetermination of Lease Residual Values” below.
We also review our investment in operating leases for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured by the amount carrying values exceed their fair values.


We expect used vehicle prices to be negatively impacted in the near term due to the disruption in physical auctions and declines in demand for used vehicles as a result of COVID-19, which will result in higher depreciation expense. Sustained declines in used vehicle prices may result in significant increases in depreciation expense over the remaining lease terms and, depending on the severity of the declines, potential impairment charges.
The following table summarizes our number of lease terminations and the method of disposition:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(Units (1) in thousands)
(Units (1) in thousands)
United States Segment          
Termination units:          
Sales at outstanding contractual balances (2)
319
 264
 267
359
 319
 264
Sales through auctions and dealer direct programs (3)
155
 167
 132
156
 155
 167
Total termination units474
 431
 399
515
 474
 431
Canada Segment          
Termination units:          
Sales at outstanding contractual balances (2)
65
 49
 45
78
 65
 49
Sales through auctions and dealer direct programs (3)
6
 7
 8
7
 6
 7
Total termination units71
 56
 53
85
 71
 56
Consolidated          
Termination units:          
Sales at outstanding contractual balances (2)
384
 313
 312
437
 384
 313
Sales through auctions and dealer direct programs (3)
161
 174
 140
163
 161
 174
Total termination units545
 487
 452
600
 545
 487
_______________________
(1)A unit represents one terminated lease by their method of disposition during the period shown. Unit counts do not include leases that were terminated due to lessee defaults.
(2)Includes vehicles purchased by lessees or dealers for the contractual residual value at lease maturity or the outstanding contractual balance if purchased prior to lease maturity.
(3)Includes vehicles sold through online auctions and market based pricing options under our dealer direct programs or through physical auctions.

34


Liquidity and Capital Resources
Our liquidity strategy is to fund current and future obligations through our cash flows from operations and our diversified funding programs in a cost and risk effective manner. Our cash flows are generally impacted by cash requirements related to the volume of finance receivable and operating lease acquisitions and various operating and funding costs incurred, which are largely funded through payments received on our assets and our funding sources outlined below. As noted, the levels of incentive financing sponsored by AHM and HCI can impact our financial results and liquidity from period to period. Increases or decreases in incentive financing programs typically increase or decrease our financing penetration rates, respectively, which result in increased or decreased acquisition volumes and increased or decreased liquidity needs, respectively. At acquisition, we receive the subsidy payments, which reduce the cost of consumer loan and lease contracts acquired, and we recognize such payments as revenue over the term of the loan or lease.
In an effort to minimize liquidity risk and interest rate risk and the resulting negative effects on our margins, results of operations and cash flows, our funding strategy incorporates investor diversification and the utilization of multiple funding sources including commercial paper, medium term notes, bank loans and asset-backed securities. We incorporate a funding strategy that takes into consideration factors such as the interest rate environment, domestic and foreign capital market conditions, maturity profiles, and economic conditions. See above under “—COVID-19 Pandemic" for additional information. We believe that our funding sources, combined with cash provided by operating and investing activities, will provide sufficient liquidity for us to meet our debt service and working capital requirements over the next twelve months.
The summary of outstanding debt presented in the tables and discussion below in this section “—Liquidity and Capital Resources” as of March 31, 2020, 2019 2018 and 20172018 includes foreign currency denominated debt which was translated into U.S. dollars using the relevant exchange rates as of March 31, 2020, 2019 2018 and 2017,2018, as applicable. Additionally, the amounts in this section that are presented in “C$” (Canadian dollar), “€” (Euro) and “£” (Sterling) were converted into U.S. dollars solely for your convenience based on the exchange rate on March 31, 20192020 of 1.3349, 1.12161.4062, 1.1016 and 1.3006,1.2437, respectively, per U.S. dollar. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or that they could be converted into U.S. dollars at the rates indicated.

35


Summary of Outstanding Debt
The table below presents a summary of our outstanding debt by various funding sources:
      
Weighted average
contractual interest rate
      
Weighted average
contractual interest rate
March 31, March 31,March 31, March 31,
2019 2018 2017 2019 2018 20172020 2019 2018 2020 2019 2018
                      
(U.S. dollars in millions)      (U.S. dollars in millions)      
United States Segment                      
Unsecured debt:      
          
    
Commercial paper$5,029
 $4,437
 $3,609
 2.67% 1.91% 1.02%$4,486
 $5,029
 $4,437
 1.83% 2.67% 1.91%
Bank loans3,896
 4,393
 4,890
 3.30% 2.52% 1.68%3,797
 3,896
 4,393
 2.21% 3.30% 2.52%
Private MTN program999
 1,698
 2,946
 3.84% 5.40% 3.77%999
 999
 1,698
 3.84% 3.84% 5.40%
Public MTN program24,117
 21,398
 19,491
 2.35% 1.92% 1.63%25,130
 24,117
 21,398
 2.07% 2.35% 1.92%
Euro MTN programme868
 1,111
 1,086
 1.89% 1.95% 1.83%28
 868
 1,111
 2.23% 1.89% 1.95%
Total unsecured debt34,909
 33,037
 32,022
      34,440
 34,909
 33,037
      
Secured debt7,671
 7,521
 7,680
 2.41% 1.68% 1.24%8,710
 7,671
 7,521
 2.26% 2.41% 1.68%
Total debt$42,580
 $40,558
 $39,702
      $43,150
 $42,580
 $40,558
      
                      
Canada Segment                      
Unsecured debt:                      
Commercial paper$726
 $730
 $853
 2.06% 1.55% 0.87%$1,004
 $726
 $730
 1.73% 2.06% 1.55%
Related party debt749
 1,085
 1,201
 2.18% 1.64% 0.95%533
 749
 1,085
 1.76% 2.18% 1.64%
Bank loans1,066
 1,026
 993
 2.62% 2.27% 1.50%1,141
 1,066
 1,026
 2.01% 2.62% 2.27%
Other debt3,514
 3,250
 2,736
 2.50% 2.20% 1.90%3,266
 3,514
 3,250
 2.47% 2.50% 2.20%
Total unsecured debt6,055
 6,091
 5,783
      5,944
 6,055
 6,091
      
Secured debt1,119
 1,212
 742
 2.49% 2.09% 1.24%1,038
 1,119
 1,212
 2.13% 2.49% 2.09%
Total debt$7,174
 $7,303
 $6,525
      $6,982
 $7,174
 $7,303
      
                      
Consolidated                      
Unsecured debt:                      
Commercial paper$5,755
 $5,167
 $4,462
 2.60% 1.86% 0.99%$5,490
 $5,755
 $5,167
 1.81% 2.60% 1.86%
Related party debt749
 1,085
 1,201
 2.18% 1.64% 0.95%533
 749
 1,085
 1.76% 2.18% 1.64%
Bank loans4,962
 5,419
 5,883
 3.16% 2.48% 1.65%4,938
 4,962
 5,419
 2.16% 3.16% 2.48%
Private MTN program999
 1,698
 2,946
 3.84% 5.40% 3.77%999
 999
 1,698
 3.84% 3.84% 5.40%
Public MTN program24,117
 21,398
 19,491
 2.35% 1.92% 1.63%25,130
 24,117
 21,398
 2.07% 2.35% 1.92%
Euro MTN programme868
 1,111
 1,086
 1.89% 1.95% 1.83%28
 868
 1,111
 2.23% 1.89% 1.95%
Other debt3,514
 3,250
 2,736
 2.50% 2.20% 1.90%3,266
 3,514
 3,250
 2.47% 2.50% 2.20%
Total unsecured debt40,964
 39,128
 37,805
      40,384
 40,964
 39,128
      
Secured debt8,790
 8,733
 8,422
 2.42% 1.74% 1.24%9,748
 8,790
 8,733
 2.25% 2.42% 1.74%
Total debt$49,754
 $47,861
 $46,227
      $50,132
 $49,754
 $47,861
      
Commercial Paper
As of March 31, 2019,2020, we had commercial paper programs in the United States of $7.0 billion and in Canada of C$2.02.5 billion ($1.51.8 billion). Interest rates on the commercial paper are fixed at the time of issuance. During fiscal year 2019,2020, consolidated commercial paper month-end outstanding principal balances ranged from $4.9$4.2 billion to $6.2 billion.

36


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

Bank Loans
During fiscal year 2019,2020, AHFC did not enterentered into anyfive floating rate term loan agreements for a total of $1.0 billion and one fixed rate term loan for $200 million. HCFI entered into one floating rate term loan agreement for an aggregateC$250 million ($178 million) and two fixed rate term loan agreements for a total of C$350180 million ($262128 million). As of March 31, 2019,2020, we had bank loans denominated in U.S. dollars and Canadian dollars with floating and fixed interest rates, in principal amounts ranging from $37$36 million to $600 million. As of March 31, 2019,2020, the remaining maturities of all bank loans outstanding ranged from 23587 days to approximately 5.55.0 years. The weighted average remaining maturity on all bank loans was 1.9 years as of March 31, 2019.2020.
Our bank loans contain customary restrictive covenants, including limitations on liens, mergers, consolidations and asset sales, and a financial covenant that requires us to maintain positive consolidated tangible net worth. In addition to other customary events of default, the bank loans include cross-default provisions and provisions for default if HMC does not maintain ownership, whether directly or indirectly, of at least 80% of the outstanding capital stock of AHFC or HCFI, as applicable. All of these covenants and events of default are subject to important limitations and exceptions under the agreements governing the bank loans. As of March 31, 2019,2020, management believes that AHFC and HCFI were in compliance with all covenants contained in our bank loans.
Medium Term Note (MTN) Programs
Private MTN Program
AHFC no longer issues MTNs under its Rule 144A Private MTN Program. As of March 31, 2019,2020, the remaining maturities of Private MTNs outstanding did not exceed 2.51.5 years. Private MTNs were issued pursuant to the terms of an issuing and paying agency agreement, which requires AHFC to comply with certain covenants, including negative pledge provisions, and includes customary events of defaults. As of March 31, 2019,2020, management believes that AHFC was in compliance with all covenants contained in the Private MTNs.
Public MTN Program
AHFC is a well-known seasoned issuer under SEC rules and issues Public MTNs pursuant to a registration statement on Form S-3 filed with the SEC. In August 2016,2019, AHFC filedrenewed its Public MTN program by filing a registration statement with the SEC under which it may issue from time to time up to $30.0 billion aggregate principal amount of Public MTN,MTNs, which includes the issuance of foreign currency denominated notes into international markets. The aggregate principal amount of MTNs offered under this program may be increased from time to time.
The Public MTNs may have original maturities of 9 months or more from the date of issue, may be interest bearing with either fixed or floating interest rates, or may be discounted notes. During fiscal year 2019,2020, AHFC issued $3.6 billion aggregate principal amount of U.S. dollar denominated fixed rate MTNs, with an original maturity ranging from 23 months to 5.0 years, $4.3$2.7 billion aggregate principal amount of U.S. dollar denominated floating rate MTNs and $4.7 billion aggregate principal amount of U.S. dollar denominated fixed rate notes, with an original maturity ranging from 1012 months to 3.0 years and €1.1 billion ($1.2 billion) of EUR denominated fixed rate MTNs, with an original maturity of 3.57.0 years. The weighted average remaining maturities of all Public MTNs was 2.42.3 years as of March 31, 2019.2020.
The Public MTNs are issued pursuant to an indenture, which requires AHFC to comply with certain covenants, including negative pledge provisions and restrictions on AHFC’s ability to merge, consolidate or transfer substantially all of its assets or the assets of its subsidiaries, and includes customary events of default. As of March 31, 2019,2020, management believes that AHFC was in compliance with all covenants under the indenture.
Euro MTN Programme
The Euro MTN Programme was retired in August 2014. NotesAHFC has one note outstanding under this program that are currentlyprogram. The note has a maturity date of February 21, 2023, a fixed interest rate and is not listed on the Luxembourg Stock Exchange will remain listed through their maturity. As of March 31, 2019, the remaining maturities of Euro MTNs outstanding under this program did not exceed 3.9 years. Euro MTNs wereExchange. The note was issued pursuant to the terms of an agency agreement which requires AHFC to comply with certain covenants, including negative pledge provisions, and includes customary events of default. As of March 31, 2019,2020, management believes that AHFC was in compliance with all covenants contained in the Euro MTNs.

37


The table below presents a summary of outstanding debt issued under our MTN Programs by currency:
March 31,March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
U.S. dollar$21,210
 $19,717
 $20,141
$22,309
 $21,210
 $19,717
Euro3,969
 3,623
 2,607
3,076
 3,969
 3,623
Sterling778
 839
 748
744
 778
 839
Japanese yen27
 28
 27
28
 27
 28
Total$25,984
 $24,207
 $23,523
$26,157
 $25,984
 $24,207
Other Debt
HCFI issues privately placed Canadian dollar denominated notes, with either fixed or floating interest rates. During fiscal year 2019,2020, HCFI entered into threeone private placement tradestransaction for an aggregate of C$1.4 billion500 million ($1.0 billion)356 million). As of March 31, 2019,2020, the remaining maturities of all of HCFI’s Canadian notes outstanding ranged from 6817 days to approximately 6.25.1 years. The weighted average remaining maturities of these notes was 2.92.5 years as of March 31, 2019.2020.
The notes are issued pursuant to the terms of an indenture, which requires HCFI to comply with certain covenants, including negative pledge provisions, and includes customary events of default. As of March 31, 2019,2020, management believes that HCFI was in compliance with all covenants contained in the privately placed notes.
Secured Debt
Asset-Backed Securities
We enter into securitization transactions for funding purposes. SecuritizationOur securitization transactions involve transferring pools of retail loans and operating leases to trusts.bankruptcy-remote special purpose entities (SPEs). The trustsSPEs are special-purpose entities that we establishestablished to accommodate securitization structures. Securitization trustsstructures, which have the limited purpose of acquiring assets, issuing asset-backed securities, and making payments on the securities. Assets transferred to securitization trustsSPEs are considered legally isolated from us and the claims of our creditors. We continue to service the retail loans and operating leases transferred to the trusts.SPEs. Investors in the notes issued by a trustSPE only have recourse to the assets of such trustSPE and do not have recourse to the assets of AHFC, HCFI, or our other subsidiaries or to other trusts.SPEs. The assets of SPEs are the only source of funds for repayment on the notes.
Our securitizations are structured to provide credit enhancements to investors in the notes issued by the trusts.SPEs. Credit enhancements can include the following:
Subordinated certificateswhich are securities issued by the trustsSPEs that are retained by us and are subordinated in priority of payment to the notes.
Overcollateralizationwhich occurs when the principal balance of securitized assetsasset balances that exceed the balance of securities issued by the trust.SPEs.
Excess interest which allows excess interest collections to be used to cover losses on defaulted loans.
Reserve fundswhich are restricted cash accounts held by the trustsSPEs to cover shortfalls in payments of interest and principal required to be paid on the notes.
Yield supplement accountswhich are restricted cash accounts held by the trustsSPEs to supplement interest payments on notes.
The risk retention regulations in Regulation RR of the Securities Exchange Act of 1934, as amended (Exchange Act), require the sponsor to retain an economic interest in the credit risk of the securitized receivables,assets, either directly or through one or more majority-owned affiliates. Standard risk retention options allow the sponsor to retain either an eligible vertical interest, an eligible horizontal residual interest, or a combination of both. AHFC has satisfied this obligation by retaining an eligible vertical interest of an amount equal to at least 5% of the principal amount of each class of note and certificate issued for the securitization transaction that was subject to this rule but may choose to use other structures in the future.
We are required to consolidate the securitization trustsSPEs in our financial statements, which results in the securitizations being accounted for as on-balance sheet secured financings. The securitized receivablesassets remain on our consolidated balance sheet along with the notes issued by the trusts. The notes are secured solely by the assets of the applicable trust and not by any of our other assets or those of other trusts. The assets of a trust are the only source of funds for repayment on the notes of such trust.SPEs.

38


During fiscal year 2019,2020, we issued notes through asset-backed securitizations totaling $4.8$6.2 billion, which were secured by consumer finance receivablesassets with an initial principal balance of $5.7$6.8 billion.
Credit Agreements
Syndicated Bank Credit Facilities
AHFC maintains a $3.5 billion 364-day credit agreement, which expires on February 28, 2020,26, 2021, a $2.1 billion credit agreement, which expires on March 3, 2021,February 28, 2023, and a $1.4 billion credit agreement, which expires on March 3, 2023.February 28, 2025. As of March 31, 2019,2020, no amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.
HCFI maintains a C$1.62.0 billion ($1.21.4 billion) credit agreement which provides that HCFI may borrow up to C$800 million1 billion ($599711 million) on a one-year revolving basis and up to C$800 million1 billion ($599711 million) on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 20202021 and the five-year tranche of the credit agreement expires on March 25, 2024.2025. As of March 31, 2019,2020, no amounts were drawn upon under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the expiration date of each respective tranche.
The credit agreements contain customary conditions to borrowing and customary restrictive covenants, including limitations on liens and limitations on mergers, consolidations and asset sales.sales, and limitations on affiliate transactions. The credit agreements also require AHFC and HCFI to maintain a positive consolidated tangible net worth as defined in their respective credit agreements. The credit agreements, in addition to other customary events of default, include cross-default provisions and provisions for default if HMC does not maintain ownership, whether directly or indirectly, of at least 80% of the outstanding capital stock of AHFC or HCFI, as applicable. In addition, the AHFC and HCFI credit agreements contain provisions for default if HMC’s obligations under the HMC-AHFC Keep Well Agreement or the HMC-HCFI Keep Well Agreement, as applicable, become invalid, voidable, or unenforceable. All of these conditions, covenants and events of default are subject to important limitations and exceptions under the agreements governing the credit agreements. As of March 31, 2019,2020, management believes that AHFC and HCFI were in compliance with all covenants contained in the respective credit agreements.
Other Credit Agreements
AHFC maintains other committed lines of credit that allow the Company access to an additional $1.0 billion in unsecured funding with multipletwo banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales and a requirement for AHFC to maintain a positive consolidated tangible net worth. As of March 31, 2019,2020, no amounts were drawn upon under these agreements. These agreements expire in September 2019. AHFC2020. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates.
Keep Well Agreements
HMC has entered into separate Keep Well Agreements with AHFC and HCFI. For additional information, refer to “Part I, Item 1. Business—Relationships with HMC and Affiliates—HMC and AHFC Keep Well Agreement” and “Part I, Item 1. Business—Relationships with HMC and Affiliates—HMC and HCFI Keep Well Agreement.
As consideration for HMC’s obligations under the Keep Well Agreements, we have agreed to pay HMC a quarterly fee based on the amount of outstanding Debt pursuant to Support Compensation Agreements, dated OctoberApril 1, 2005.2019. We incurred expenses of $2368 million, $2223 million and $2022 million during fiscal years 2020, 2019 2018 and 2017,2018, respectively, pursuant to these Support Compensation Agreements.Agreements and the predecessor agreements.
Indebtedness of Consolidated Subsidiaries
As of March 31, 2019,2020, AHFC and its consolidated subsidiaries had $58.7$59.7 billion of outstanding indebtedness and other liabilities, including current liabilities, of which $16.2$17.2 billion consisted of indebtedness and liabilities of our consolidated subsidiaries. None of AHFC’s consolidated subsidiaries had any outstanding preferred equity.

39


Derivatives
We utilize derivative instruments to mitigate exposures to fluctuations in interest rates and foreign currency exchange rates. The types of derivative instruments include interest rate swaps, basis swaps, and cross currency swaps. Interest rate and basis swap agreements are used to mitigate the effects of interest rate fluctuations of our floating rate debt relative to our fixed rate finance receivables and operating lease assets. Cross currency swap agreements are used to manage currency and interest rate risk exposure on foreign currency denominated debt. The derivative instruments contain an element of credit risk in the event the counterparties are unable to meet the terms of the agreements.
All derivative financial instruments are recorded on our consolidated balance sheet as assets or liabilities, and carried at fair value. Changes in the fair value of derivatives are recognized in our consolidated statements of income in the period of the change. Since we do not elect to apply hedge accounting, the impact to earnings resulting from these valuation adjustments as reported under GAAP is not representative of our results of operations as evaluated by management. Realized gains and losses on derivative instruments, net of realized gains and losses on foreign currency denominated debt, are included in the measure of net revenues when we evaluate segment performance. Refer to Note 15—Segment Information of Notes to Consolidated Financial Statements for additional information about segment information and Note 5—Derivative Instruments of Notes to Consolidated Financial Statements for additional information on derivative instruments.
Off-Balance Sheet Arrangements
We are not a party to off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations, excluding lending commitments to dealers and derivative obligations, by fiscal year payment period, as of March 31, 2019:2020:
Payments due by periodPayments due by period
Total 2020 2021 2022 2023 2024 ThereafterTotal 2021 2022 2023 2024 2025 Thereafter
                          
(U.S. dollars in millions)(U.S. dollars in millions)
Unsecured debt obligations (1)
$41,050
 $15,675
 $9,099
 $6,129
 $5,324
 $3,373
 $1,450
$40,453
 $15,768
 $7,767
 $8,193
 $4,792
 $2,077
 $1,856
Secured debt obligations (1)
8,803
 4,678
 2,573
 1,222
 288
 42
 
9,762
 5,089
 2,944
 1,463
 266
 
 
Interest payments on debt (2)
2,484
 986
 652
 380
 219
 128
 119
2,116
 833
 548
 354
 201
 80
 100
Operating lease obligations70
 10
 10
 9
 9
 8
 24
61
 10
 9
 9
 8
 7
 18
Total$52,407
 $21,349
 $12,334
 $7,740
 $5,840
 $3,551
 $1,593
$52,392
 $21,700
 $11,268
 $10,019
 $5,267
 $2,164
 $1,974
_______________________
(1)Debt obligations reflect the remaining principal obligations of our outstanding debt and do not reflect unamortized debt discounts and fees. Repayment schedule of secured debt reflects payment performance assumptions on underlying receivables. Foreign currency denominated debt principal is based on exchange rates as of March 31, 2019.2020.
(2)Interest payments on floating rate and foreign currency denominated debt based on the applicable floating rates and/or exchange rates as of March 31, 2019.2020.
The obligations in the above table do not include certain lending commitments to dealers since the amount and timing of future payments is uncertain. Refer to Note 9—Commitments and Contingencies of Notes to Consolidated Financial Statements for additional information on these commitments.
Our contractual obligations on derivative instruments are also excluded from the table above because our future cash obligations under these contracts are inherently uncertain. We recognize all derivative instruments on our consolidated balance sheet at fair value. The amounts recognized as fair value do not represent the amounts that will be ultimately paid or received upon settlement under these contracts. Refer to Note 5—Derivative Instruments of Notes to Consolidated Financial Statements for additional information on derivative instruments.
New Accounting Standards
Refer to Note 1(o)—Recently Issued Accounting Standards of Notes to Consolidated Financial Statements.

40


Critical Accounting Policies
Critical accounting policies are those accounting policies that require the application of our most difficult, subjective, or complex judgments, often requiring us to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition, cash flows, and results of operations. The impact and any associated risks related to these estimates on our financial condition, cash flows, and results of operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operation” where such estimates affect reported and expected financial results. Different assumptions or changes in economic circumstances could result in additional changes to the determination of the allowance for credit losses and the determination of lease residual values.
Credit Losses
We maintain an allowance for credit losses for management’s estimate of probable losses incurred on our finance receivables. We also maintain an estimate for early termination losses on operating lease assets due to lessee defaults and an allowance for credit losses on past due operating lease rental payments. These estimates are evaluated by management, at minimum, on a quarterly basis.
Consumer finance receivables are collectively evaluated for impairment. Delinquencies and losses are monitored on an ongoing basis and this 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. Estimated losses on operating leases expected to terminate early due to lessee defaults are also determined collectively, consistent with the methodologies used for consumer finance receivables.
Dealer finance receivablesloans are individually evaluated for impairment when specifically identified as impaired. Dealer finance receivablesloans are considered impaired when it is probable that we will be unable to collect all amounts due according to the original terms of the loan. Our determination of whether dealer loans are impaired is based on evaluations of dealership payment history, financial condition, and cash flows, and their ability to perform under the terms of the loans.loans, and collateral values as applicable. Dealer loans that have not been specifically identified as impaired are collectively evaluated for impairment.
Refer to Note 1(e)—Finance Receivables, Note 1(f)—Investment in Operating Leases and Note 1(i)—Vehicles Held for Disposition of Notes to Consolidated Financial Statements for additional information regarding charge-offs or write-downs of contractual balances of retail and dealer finance receivablesloans and operating leases.
Sensitivity Analysis
Our allowance for credit losses and early termination losses on operating leases requires significant judgment about inherently uncertain factors. The estimates are based on management’s evaluation of many factors, including our historical credit loss experience, the value of the underlying collateral, delinquency trends, and economic conditions. The estimates are based on information available as of each reporting date. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates.
Sensitivity Analysis
If we had experienced a 10% increaseand 20% increases in net charge-offs ofestimated incurred losses on our consumer finance receivables duringwould have resulted in increases to the twelve-month period ended March 31, 2019, our provisionallowance for credit losses as of March 31, 2020 of $36 million and $73 million, respectively. Similarly, 10% and 20% increases in estimated incurred losses due to defaults on operating leases would have increased by approximately $39 million during the period. Similarly, if we had experienced a 10% increaseresulted in realized losses on the disposition of repossessed operating lease vehicles during the twelve-month period ended March 31, 2019, we would have recognized an additional $20 million inincreases to estimated early termination losses in our consolidated statementas of income during the period.March 31, 2020 of $32 million and $63 million, respectively.



41


Determination of Lease Residual Values
Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer at the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of lease term. We assess our estimates for end of term market values of the leased vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends and market information on new and used vehicles. Our leasing volumes and those ofacross the automotive industry have increased significantly in recent years. As a result, the supply of off-lease vehicles will continue to increase over the next several years which could negatively impact used vehicle prices.
For operating leases, adjustments to estimated residual values are made on a straight-line basis over the remaining term of each lease and recognized as depreciation expense. For direct financing leases, downward adjustments for declines in estimated residual values deemed other-than-temporary are recognized as a loss on lease residual values in the period in which the estimate changed.
Sensitivity Analysis
If future estimated auction values for all outstanding operating leases as of March 31, 20192020 were to decrease by $100 per unit from our current estimates, the total impact would be an increase of approximately $71$74 million in depreciation expense, which would be recognized over the remaining lease terms. If future return rates for all operating leases were to increase by one percentage point from our current estimates, the total impact would be an increase of approximately $12$13 million in depreciation expense, which would be recognized over the remaining lease terms. This sensitivity analysis may be asymmetric and is specific to the conditions in effect as of March 31, 2019.2020. Additionally, any declines in auction values are likely to have a negative effect on return rates which could affect the severity of the impact on our results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks. Our financial condition, cash flows, and results of operations depend on the extent to which we effectively identify and manage these risks. The principal types of risk to our business include:
Interest rate risk arising from changes in interest rates related to our funding, investing, and cash management activities. Our assets consist primarily of fixed rate receivables and operating lease assets, however, our liabilities consist of both floating and fixed rate debt. We utilize interest rate and basis swaps to mitigate the impact of interest rate movements on our cash flows and net interest margins.
Exchange rate risk arising from changes in value of our foreign currency denominated debt in response to fluctuations in exchange rates of various currencies. We enter into cross currency swaps concurrently with the issuance of this debt to convert all interest and principal payments to either of our functional currencies, which is United States dollars in the United States segment and Canadian dollars in the Canadian segment, which effectively eliminates our foreign currency exchange rate risks.
Counterparty risk arising primarily with our derivative contracts. To manage this risk, we limit our exposure to counterparties in accordance with credit rating based guidelines. We also enter into master netting agreements which help to mitigate our exposure to loss in the case of defaults. In Canada, HCFI is a party to credit support agreements that require posting of cash collateral to mitigate credit risk on derivative positions.
To provide a quantitative measure of the sensitivity of interest rate movements on our pre-tax cash flows, we have estimated the effect of a hypothetical 100 basis point increase and decrease to benchmark interest rates on our floating rate financial instruments for the 12-month periods ending March 31, 20202021 and 20192020 below. Our estimates were based upon our existing receivables, debt, and derivatives as of March 31, 20192020 and 2018.2019. We do not include any assumptions for reinvestment of maturing assets and refinancing of maturing debt. The estimates for a 100 basis point decrease assume that rates cannot fall below zero percent.

42


 Impact on pre-tax cash flows for the 12 months ending March 31, Impact on pre-tax cash flows for the 12 months ending March 31,
Hypothetical change in interest rate 2020 2019 2021 2020
100 basis point increase $21 million increase $17 million increase $17 million decrease $21 million increase
100 basis point decrease $21 million decrease $17 million decrease $17 million increase $21 million decrease
The net impact on pre-tax cash flows of a hypothetical increase or decrease in interest rates was higherlower for the period ending March 31, 20202021 compared to the period ending March 31, 20192020 due to the increase in the mix of receivepay float relative to payreceive float instruments.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, the accompanying notes to consolidated financial statements, and the Report of Independent Registered Public Accounting Firm that are filed as part of this Form 10-K are listed under “Part IV, Item 15. Exhibits, Financial Statement Schedules” and are set forth beginning on page F-1 immediately following the Signatures page of this Form 10-K.
The required supplementary financial information is disclosed in Note 16—Selected Quarterly Financial Data (Unaudited) of Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer have performed an evaluation of our disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Exchange Act, as of March 31, 2019,2020, and each has concluded that such disclosure controls and procedures are effective, at the reasonable assurance level, to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Management conducted, under the supervision of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, management concluded that our internal control over financial reporting was effective as of March 31, 2019.2020.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC applicable to non-accelerated filers.

43


Changes in Internal Control over Financial Reporting
There were no changes in the internal control over financial reporting during the quarter ended March 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.

44


PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have omitted this section pursuant to General Instruction I(2) of Form 10-K.
Item 11. Executive Compensation
We have omitted this section pursuant to General Instruction I(2) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We have omitted this section pursuant to General Instruction I(2) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We have omitted this section pursuant to General Instruction I(2) of Form 10-K.
Item 14. Principal Accounting Fees and Services
The following table represents aggregate costs for fees and services provided to us by our independent registered public accounting firm, KPMG LLP.
Years ended March 31,Years ended March 31,
2019 20182020 2019
      
(U.S. dollars in thousands)(U.S. dollars in thousands)
Audit fees$6,874
 $6,800
$6,653
 $6,874
Audit-related fees428
 433
428
 428
Tax fees
 

 
All other fees
 

 
Total$7,302
 $7,233
$7,081
 $7,302
Audit fees are for audit services, which are professional services provided by independent auditors for the audit or review of our financial statements or for services that are normally provided by independent auditors with respect to any submissions required under applicable laws and regulations.
Audit-related fees are for audit-related services, which are assurance and related services by independent auditors that are reasonably related to the performance of the audit or review of our financial statements and other related services. This category includes fees for agreed upon procedures and other services related to our securitization transactions.
Auditor Pre-Approval Policy
We comply with pre-approval policies and procedures established by HMC which, among other things, list particular audit services and non-audit services that may be provided without specific pre-approval. None of the services provided were waived from pre-approval requirements pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

45


PART IV
Item 15. Exhibits, Financial Statement Schedules
(1) Our consolidated financial statements, the accompanying notes to consolidated financial statements, and the Report of Independent Registered Public Accounting Firm that are filed as part of this Form 10-K are set forth beginning on page F-1 immediately following the Signatures page of this Form 10-K.
(2) Financial statement schedules have been omitted because they are not applicable, the information required to be contained in them is disclosed in Note 2—Finance Receivables of Notes to Consolidated Financial Statements or the amounts involved are not sufficient to require submission.
(3) Exhibits
Exhibit
Number
 Description
3.1(1)
 
3.2(1)
 
4.1(1)
 
4.2 American Honda Finance Corporation agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to issues of long-term debt of American Honda Finance Corporation and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the American Honda Finance Corporation and its subsidiaries.
4.3(2)
 
4.4 
4.5(5)
 
4.6(18)(6)
 
4.7 
4.8(23)(9)
 
4.9(23)(9)
 
4.10(23)(9)
 
4.11(23)(9)
 
4.12(23)(9)
 
4.13(23)(9)
 
4.14(24)
4.15(24)

46


Exhibit
Number
Description
10.1(8)(10)
 

Exhibit
Number
Description
10.2(9)(11)
 
10.3(10)(12)
 
10.4(11)(13)
 
10.5(12)(14)
 
10.6(19)(15)
 
10.7(23)(9)
 
10.8(13)(16)
10.9(17)
 
10.9(20)
10.10(14)(18)
 
10.11(21)
10.12(15)(19)
 
10.1310.12(22)
10.14(16)(20)
 
10.1510.13(23)(21)
 
10.1610.14(17)(22)
 
10.1710.15(23)
 
23.1(23)(24)
 
31.1(23)(24)
 
31.2(23)(24)
 

47


Exhibit
Number
 Description
32.1(24)(25)
 
32.2(24)(25)
 
101.INS(23)(24)
 XBRL Instance Document
101.SCH(23)(24)
 XBRL Taxonomy Extension Schema Document
101.CAL(23)(24)
 XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB(23)(24)
 XBRL Taxonomy Extension Label Linkbase Document
101.PRE(23)(24)
 XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF(23)(24)
 XBRL Taxonomy Extension Definition Linkbase Document
________________________
(1)Incorporated herein by reference to the same numbered Exhibit filed with our registration statement on Form 10, dated June 28, 2013.
(2)Incorporated herein by reference to the same numbered Exhibit filed with our registration statement on Form 10, amendment No. 1, dated August 7, 2013.
(3)Incorporated herein by reference to Exhibit number 4.5 filed with our registration statement on Form 10, amendment No. 1, dated August 7, 2013.
(4)Incorporated herein by reference to the same numbered Exhibit filed with our quarterly report on Form 10-Q, dated February 12, 2015.
(5)Incorporated herein by reference to Exhibit number 4.1 filed with our registration statement on Form S-3, dated September 5, 2013.
(6)Incorporated herein by reference to the same numbered Exhibit filed with our quarterly report on Form 10-Q, dated February 8, 2018.
(7)Incorporated herein by reference to Exhibit number 4.1 filed with our current report on Form 8-K, dated February 12, 2014.August 8, 2019.
(7)(8)Incorporated herein by reference to Exhibit number 4.2 filed with our current report on Form 8-K, dated August 10, 2016.8, 2019.
(8)(9)Incorporated herein by reference to the same numbered Exhibit filed with our annual report on Form 10-K, dated June 21, 2019.
(10)Incorporated herein by reference to the same numbered Exhibit filed with our current report on Form 8-K, dated March 24, 2014.
(9)(11)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated June 30, 2014.
(10)(12)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated March 13, 2015.
(11)(13)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated March 23, 2016.
(12)(14)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated March 23, 2017.
(13)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated March 3, 2017.
(14)Incorporated herein by reference to Exhibit number 10.2 filed with our current report on Form 8-K, dated March 3, 2017.
(15)Incorporated herein by reference to Exhibit number 10.3 filed with our current report on Form 8-K, dated March 3, 2017.
(16)Incorporated herein by reference to Exhibit 10.1 filed with our registration statement on Form 10, dated June 28, 2013.
(17)Incorporated herein by reference to Exhibit 10.3 filed with our registration statement on Form 10, dated June 28, 2013.
(18)Incorporated herein by reference to the same numbered Exhibit filed with our quarterly report on Form 10-Q, dated February 8, 2018.
(19)Incorporated herein by reference to the same numbered Exhibit filed with our annual report on Form 10-K, dated June 21, 2018.
(20)(16)Incorporated herein by reference to Exhibit number 10.810.1 filed with our annualcurrent report on Form 10-K,8-K, dated March 23, 2020.
(17)Incorporated herein by reference to Exhibit number 10.1 filed with our current report on Form 8-K, dated March 4, 2020.
(18)Incorporated herein by reference to Exhibit number 10.2 filed with our current report on Form 8-K, dated March 4, 2020.
(19)Incorporated herein by reference to Exhibit number 10.3 filed with our current report on Form 8-K, dated March 4, 2020.
(20)Incorporated herein by reference to Exhibit 10.1 filed with our registration statement on Form 10, dated June 21, 2018.28, 2013.
(21)Incorporated herein by reference to Exhibit number 10.1010.15 filed with our annual report on Form 10-K, dated June 21, 2018.2019.
(22)Incorporated herein by reference to Exhibit number 10.1210.3 filed with our registration statement on Form 10, dated June 28, 2013.
(23)Incorporated herein by reference to Exhibit 10.17 filed with our annual report on Form 10-K, dated June 21, 2018.2019.
(23)(24)Filed herewith.
(24)(25)Furnished herewith.
Item 16. Form 10-K Summary
None.

48


Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 21, 201922, 2020
AMERICAN HONDA FINANCE CORPORATION
  
By:/s/ Paul C. Honda 
 
Paul C. Honda
Vice President and Assistant Secretary
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Hideo Moroe 

President and Director
 June 21, 201922, 2020
Hideo Moroe
(Principal Executive Officer)

 
/s/ Masahiro Nakamura 

Vice President, Treasurer and Director
 June 21, 201922, 2020
Masahiro Nakamura 
(Principal Financial Officer)

  
/s/ Paul C. Honda 

Vice President and Assistant Secretary
 June 21, 201922, 2020
Paul C. Honda
(Principal Accounting Officer)

 
/s/ Ferrell Kemp 

Vice President and Director
 June 21, 201922, 2020
Ferrell Kemp    
  

Director
  
Shinji Aoyama  
  

Director
  
Jiro Morisawa  

49


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
For the fiscal year ended March 31, 20192020
 Page

F-1


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
American Honda Finance Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of American Honda Finance Corporation, a wholly-owned subsidiary of American Honda Motor Co., Inc., and subsidiaries (the Company), as of March 31, 20192020 and 2018,2019, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended March 31, 2019,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2019,2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1989.
Los Angeles, California
June 21, 201922, 2020

F-2


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in millions, except share data)
March 31,March 31,
2019 20182020 2019
Assets      
Cash and cash equivalents$795
 $783
$1,503
 $795
Finance receivables, net40,424
 37,956
39,554
 40,424
Investment in operating leases, net32,606
 31,817
33,843
 32,606
Due from Parent and affiliated companies162
 139
93
 162
Income taxes receivable228
 16
137
 228
Vehicles held for disposition252
 231
Other assets1,117
 934
1,378
 1,369
Derivative instruments380
 750
748
 380
Total assets$75,964
 $72,626
$77,256
 $75,964
Liabilities and Equity      
Debt$49,754
 $47,861
$50,132
 $49,754
Due to Parent and affiliated companies106
 87
72
 106
Accrued interest expense150
 146
Income taxes payable152
 105
239
 152
Deferred income taxes6,399
 6,035
6,589
 6,399
Other liabilities1,567
 1,382
1,689
 1,717
Derivative instruments568
 414
972
 568
Total liabilities58,696
 56,030
$59,693
 $58,696
Commitments and contingencies (Note 9)
 

 
Shareholder’s equity:      
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding
13,660,000 shares as of March 31, 2019 and 2018
1,366
 1,366
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding
13,660,000 shares as of March 31, 2020 and 2019
$1,366
 $1,366
Retained earnings15,088
 14,449
15,395
 15,088
Accumulated other comprehensive loss(118) (85)(175) (118)
Total shareholder’s equity16,336
 15,730
16,586
 16,336
Noncontrolling interest in subsidiary932
 866
977
 932
Total equity17,268
 16,596
17,563
 17,268
Total liabilities and equity$75,964
 $72,626
$77,256
 $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 10 for additional information.
March 31,March 31,
2019 20182020 2019
Finance receivables, net$9,073
 $8,895
$9,645
 $9,073
Vehicles held for disposition3
 4
Investment in operating leases, net493
 
Other assets597
 452
598
 600
Total assets$9,673
 $9,351
$10,736
 $9,673
      
Secured debt$8,790
 $8,733
$9,748
 $8,790
Accrued interest expense8
 6
Other liabilities9
 8
Total liabilities$8,798
 $8,739
$9,757
 $8,798
See accompanying notes to consolidated financial statements.

F-3


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in millions)
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
Revenues:          
Direct financing leases$4
 $13
 $34
Retail1,610
 1,369
 1,188
$1,737
 $1,614
 $1,382
Dealer232
 175
 147
222
 232
 175
Operating leases7,253
 6,890
 6,333
7,749
 7,253
 6,890
Total revenues9,099
 8,447
 7,702
9,708
 9,099
 8,447
Depreciation on operating leases5,520
 5,481
 5,056
Leased vehicle expenses5,693
 5,389
 5,391
Interest expense1,190
 897
 728
1,241
 1,190
 897
Net revenues2,389
 2,069
 1,918
2,774
 2,520
 2,159
Gain on disposition of lease vehicles131
 93
 43
Other income71
 56
 105
88
 71
 56
Total net revenues2,591
 2,218
 2,066
2,862
 2,591
 2,215
Expenses:          
General and administrative expenses456
 439
 434
498
 456
 439
Provision for credit losses249
 244
 210
402
 249
 244
Impairment loss on operating leases14
 
 

 14
 
Early termination loss on operating leases101
 108
 73
331
 101
 108
Loss on lease residual values
 3
 15
(Gain)/Loss on derivative instruments509
 (550) 315
305
 509
 (550)
(Gain)/Loss on foreign currency revaluation of debt(407) 494
 (171)(107) (407) 494
Total expenses922
 738
 876
1,429
 922
 735
Income before income taxes1,669
 1,480
 1,190
1,433
 1,669
 1,480
Income tax expense/(benefit)428
 (2,629) 437
424
 428
 (2,629)
Net income1,241
 4,109
 753
1,009
 1,241
 4,109
Less: Net income attributable to noncontrolling interest96
 100
 70
97
 96
 100
Net income attributable to
American Honda Finance Corporation
$1,145
 $4,009
 $683
$912
 $1,145
 $4,009
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in millions)
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
Net income$1,241
 $4,109
 $753
$1,009
 $1,241
 $4,109
Other comprehensive income/(loss):          
Foreign currency translation adjustment(63) 48
 (35)(109) (63) 48
Comprehensive income1,178
 4,157
 718
900
 1,178
 4,157
Less: Comprehensive income attributable to
noncontrolling interest
66
 123
 53
45
 66
 123
Comprehensive income attributable to
American Honda Finance Corporation
$1,112
 $4,034
 $665
$855
 $1,112
 $4,034
See accompanying notes to consolidated financial statements.

F-4


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(U.S. dollars in millions)
Total 
Retained
earnings
 
Accumulated
other
comprehensive
income/(loss)
 
Common
stock
 
Noncontrolling
interest
Total 
Retained
earnings
 
Accumulated
other
comprehensive
income/(loss)
 
Common
stock
 
Noncontrolling
interest
Balance at March 31, 2016$12,068
 $10,104
 $(92) $1,366
 $690
Net income753
 683
 
 
 70
Other comprehensive loss(35) 
 (18) 
 (17)
Balance at March 31, 2017$12,786
 $10,787
 $(110) $1,366
 $743
$12,786
 $10,787
 $(110) $1,366
 $743
Net income4,109
 4,009
 
 
 100
4,109
 4,009
 
 
 100
Other comprehensive loss48
 
 25
 
 23
48
 
 25
 
 23
Dividends paid$(347) $(347) $
 $
 $
(347) (347) 
 
 
Balance at March 31, 2018$16,596
 $14,449
 $(85) $1,366
 $866
$16,596
 $14,449
 $(85) $1,366
 $866
Net income1,241
 1,145
 
 
 96
1,241
 1,145
 
 
 96
Other comprehensive loss(63) 
 (33) 
 (30)
Dividends paid$(506) $(506) $
 $
 $
Balance at March 31, 2019$17,268
 $15,088
 $(118) $1,366
 $932
Net income1,009
 912
 
 
 97
Other comprehensive income(63) 
 (33) 
 (30)(109) 
 (57) 
 (52)
Dividends paid(506) (506) 
 
 
(605) (605) 
 
 
Balance at March 31, 2019$17,268
 $15,088
 $(118) $1,366
 $932
Balance at March 31, 2020$17,563
 $15,395
 $(175) $1,366
 $977
See accompanying notes to consolidated financial statements.

F-5


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
Cash flows from operating activities:          
Net income$1,241
 $4,109
 $753
$1,009
 $1,241
 $4,109
Adjustments to reconcile net income to net cash provided by operating activities:          
Debt and derivative instrument valuation adjustments104
 (42) 161
97
 104
 (42)
Loss on lease residual values and provision for credit losses249
 247
 225
Provision for credit losses402
 249
 244
Early termination loss on operating leases and impairment on operating leases115
 108
 73
331
 115
 108
Depreciation and amortization5,531
 5,491
 5,063
Depreciation on leased vehicles5,705
 5,520
 5,481
Accretion of unearned subsidy income(1,642) (1,451) (1,243)(1,648) (1,642) (1,451)
Amortization of deferred dealer participation and other deferred costs339
 318
 315
367
 339
 318
Gain on disposition of lease vehicles and fixed assets(131) (93) (43)
Gain on disposition of lease vehicles(153) (131) (90)
Deferred income taxes374
 (2,768) 688
209
 374
 (2,768)
Changes in operating assets and liabilities:          
Income taxes receivable/payable(166) 349
 257
178
 (166) 349
Other assets(62) (66) (72)(36) (51) (56)
Accrued interest/discounts on debt64
 69
 54
32
 64
 69
Other liabilities218
 96
 124
(31) 218
 96
Due to/from Parent and affiliated companies(4) 88
 (85)34
 (4) 88
Net cash provided by operating activities6,230
 6,455
 6,270
6,496
 6,230
 6,455
Cash flows from investing activities:          
Finance receivables acquired(19,058) (17,971) (16,761)(17,221) (19,058) (17,971)
Principal collected on finance receivables16,140
 15,732
 16,140
17,386
 16,140
 15,732
Net change in wholesale loans(252) (337) (197)112
 (252) (337)
Purchase of operating lease vehicles(16,389) (14,268) (15,949)(17,775) (16,389) (14,268)
Disposal of operating lease vehicles9,534
 8,304
 7,364
10,548
 9,534
 8,304
Cash received for unearned subsidy income1,966
 1,676
 1,593
1,134
 1,966
 1,676
Other investing activities, net(7) (46) (11)(6) (7) (46)
Net cash used in investing activities(8,066) (6,910) (7,821)(5,822) (8,066) (6,910)
Cash flows from financing activities:          
Proceeds from issuance of commercial paper33,697
 36,190
 41,162
37,084
 33,697
 36,190
Paydown of commercial paper(33,083) (35,520) (41,303)(37,282) (33,083) (35,520)
Proceeds from issuance of short-term debt1,099
 381
 
629
 1,099
 381
Paydown of short-term debt(300) (325) 
(1,100) (300) (325)
Proceeds from issuance of related party debt3,812
 4,135
 12,514
3,004
 3,812
 4,135
Paydown of related party debt(4,121) (4,294) (13,567)(3,193) (4,121) (4,294)
Proceeds from issuance of medium term notes and other debt9,278
 7,238
 10,488
8,633
 9,278
 7,238
Paydown of medium term notes and other debt(7,949) (7,174) (8,411)(8,144) (7,949) (7,174)
Proceeds from issuance of secured debt4,764
 5,149
 5,708
6,188
 4,764
 5,149
Paydown of secured debt(4,689) (4,901) (4,868)(5,187) (4,689) (4,901)
Dividends paid(506) (347) 
(605) (506) (347)
Net cash provided by financing activities2,002
 532
 1,723
27
 2,002
 532
Effect of exchange rate changes on cash and cash equivalents(9) 7
 (2)1
 (9) 7
Net increase in cash and cash equivalents157
 84
 170
702
 157
 84
Cash and cash equivalents at beginning of year1,226
 1,142
 972
1,383
 1,226
 1,142
Cash and cash equivalents at end of year$1,383
 $1,226
 $1,142
$2,085
 $1,383
 $1,226
Supplemental disclosures of cash flow information:          
Interest paid$985
 $826
 $674
$1,080
 $985
 $826
Income taxes paid/(received)141
 (206) (508)(69) 141
 (206)

F-6




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES

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.
March 31,March 31,
2019 2018 20172020 2019 2018
Cash and cash equivalents795
 $783
 $760
$1,503
 $795
 $783
Restricted cash included in other assets (1)
588
 443
 382
582
 588
 443
$1,383
 $1,226
 1,142
$2,085
 $1,383
 1,226
(1)Restricted cash balances relate primarily to securitization arrangements (Note 10).
See accompanying notes to consolidated financial statements.



F-7


AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1)Summary of Business and Significant Accounting Policies
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 (refer Note 1(b) Principles of Consolidation below), and references to “AHFC” refer solely to American Honda Finance Corporation (excluding AHFC’s subsidiaries).
The Company provides various forms of financing to authorized independent dealers of Honda and Acura products and their customers in the United States and Canada. The Company also finances a limited number of vehicles other than Honda and Acura products. The Company’s financing products include the following categories:
Retail Loans – The Company acquires retail installment contracts from dealers who originate the contracts with consumers. Retail loans are collateralized by liens on the related vehicles or equipment. Retail loan terms range primarily from two to six years.
Retail Leases – The Company acquires closed-end vehicle lease contracts between dealers and their customers. The dealer assigns all of its rights, title, and interest in the lease and motor vehicle to the Company upon acquisition. Lease terms range primarily from two to five years.
Dealer Loans – The Company provides wholesale and commercial loans to dealers. Wholesale loans are used by dealers to finance the purchase of inventory. The Company retains purchase money security interest in all inventory financed; however, the Company has no right to recover a product sold to consumers in the ordinary course of business. The Company has agreements with AHM and HCI, which provide for their repurchase of new, unused, and unregistered vehicles or equipment that have been repossessed from a dealer who defaults on a wholesale loan. Commercial loans are used primarily for financing dealership property and working capital purposes. Commercial loans are generally secured by the associated properties, as well as corporate or personal guarantees from, or on behalf of, the related dealer’s principals.
The Company’s finance receivables and investment in operating leases are geographically diversified throughout the United States and Canada.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and revenues and expenses for the applicable periods. Those estimates include, among other things, the residual value estimates of lease vehicles and estimates for the allowances for credit losses and early termination losses on operating leases. Actual results could differ significantly from these estimates.
(a)Business Risks
The Company’s business is substantially dependent upon the sale of Honda and Acura products. The financing business is also highly competitive. The Company’s competitors and potential competitors include national, regional, and local finance companies and other types of financial services companies, such as commercial banks, savings and loan associations, leasing companies, and credit unions. The Company’s future profitability will be largely dependent upon its ability to provide cost-competitive, quality financial products and services to its customers and to the availability and cost of its capital in relation to that of its competitors. The Company’s liquidity is largely dependent on access to credit markets. The Company has been able to meet funding needs through diversified funding sources.

F-8


Higher than expected credit losses and lower than anticipated lease residual values due to prolonged periods of negative economic and market conditions can adversely affect the Company’s financial position, results of operations, and related cash flows. The Company manages these risks with purchasing and residual value setting standards, collection efforts, and lease remarketing programs. Refer to Note 1(g) for additional discussion on the allowance for credit losses and Note 1(h) for additional discussion on the determination of lease residual values.
The Company is exposed to market risks, principally interest rate and foreign currency risks, and utilizes derivative instruments to manage those risks. Although the use of derivative instruments mitigates a substantial portion of these risks, not all risk is eliminated. Refer to Note 1(n) for additional discussion on derivative instruments.
(b)Principles of Consolidation
The consolidated financial statements include the accounts of AHFC and its subsidiaries. All subsidiaries are wholly-owned, except for HCFI, which is majority-owned (52.33% as of March 31, 20192020 and 2018)2019).
The Company also consolidates variable interest entities (VIEs) where the Company is the primary beneficiary. All consolidated VIEs are statutory trustsspecial purpose entities (SPEs) formed by the Company to accommodate securitization structures.
In April 2017, the Company sold all issued and outstanding common stock of its wholly-owned subsidiary American Honda Service Contract Corporation (AHSCC) to AHM for an amount equal to AHSCC’s total equity as of March 31, 2017. AHSCC was not material to the Company’s operations.
All significant intercompany balances and transactions have been eliminated upon consolidation.
(c)Comprehensive Income
Comprehensive income consists of net income and the effect of foreign currency translation adjustments and is presented in the consolidated statements of comprehensive income.
(d)Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term, highly liquid investments with original maturities of three months or less.
(e)Finance Receivables
Finance receivables include retail loan direct financing lease, and dealer loan portfolio segments. The retail loan portfolio segment consists of retail installment contracts with consumers. The direct financing lease portfolio segment consists of closed-end vehicle lease contracts with consumers. The dealer loan portfolio segment consists of wholesale and commercial loans with dealers.
Finance receivables are classified as held-for-investment if the Company has the intent and ability to hold the receivables for the foreseeable future or until maturity or payoff. As of March 31, 20192020 and 2018,2019, all finance receivables were classified as held-for-investment and reported at amortized cost.
Retail and dealer loans include the outstanding principal balance, allowance for credit losses, unearned origination fees, and deferred origination costs. Direct financing leases include the gross receivable balances, unearned interest income, write-down of lease residual values, allowance for credit losses, unearned origination fees, and deferred origination costs. Origination fees include payments received from AHM and HCI for incentive programs (refer to Note 6 regarding these related party transactions). For a limited number of contracts, origination fees include payments received from dealers to buy down the interest rates charged to their customers. Origination costs include initial direct origination costs (IDC) and payments made to dealers for rate participation.

Revenue on finance receivables includes contractual interest income, accretion of origination fees, and amortization of origination costs. Interest income on retail and dealer loans is accrued as earned using the simple interest method. Unearned interest income on direct financing leases is recognized as finance revenue over the term of the lease using the interest method. Origination fees and costs are recognized as revenue using the interest method over the contractual life of the finance receivables. The recognition of finance revenue on retail loans and leases is discontinued when the underlying collateral is repossessed or accounts are charged off. The recognition of finance revenue on dealer loans is discontinued when it has been determined the Company will be unable to collect all principal and interest payments.

F-9


Retail loans and leases are considered delinquent if more than 10% of a scheduled payment is contractually past due on a cumulative basis. Dealer loans are considered delinquent when any payment is contractually past due. The contractual balance of retail loans and leases, including accrued interest and fees, are automatically charged off when they become 120 days past due or earlier if they have been specifically identified as uncollectible. Dealer loans are charged off when they have been individually identified as uncollectible. Charge-offs of loan and lease balances, including uncollected interest and fees, are recognized as a reduction to the allowance for credit losses. Subsequent recoveries of amounts previously charged off are credited to the allowance.
(f)Investment in Operating Leases
The investment in operating leases is reported at cost, less accumulated depreciation and net of unearned origination fees and deferred origination costs. Origination fees include payments received from AHM for incentive programs (refer to Note 6 regarding these related party transactions). For a limited number of contracts, origination fees include payments received from dealers to buy down the rental charges. Origination costs include payments made for dealer participation. Operating lease revenue is recognized on a straight-line basis over the lease term. Operating lease revenue includes accretion of origination fees and is net of amortization of origination costs, which are also recognized on a straight-line basis over the lease term. Operating lease vehicles are depreciated on a straight-line basis over the lease term to the estimated residual value. Refer to Note 1(h) regarding the determination of lease residual values.
A portion of the Company’s operating leases is expected to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The methodologies used to determine the estimated losses are similar to the methodologies used to determine the allowance for credit losses on consumer finance receivables. Operating leases are collectively evaluated to determine the estimated losses incurred. Estimated early termination losses are recognized as a reduction to the carrying value of operating lease assets.
A review for impairment of the Company’s operating lease assets is performed whenever events or changes in circumstances indicate that the carrying values may not be recoverable. Generally, an impairment condition is determined to exist if estimated undiscounted cash flows from the use and eventual disposition of the asset is lower than the carrying value. For the purposes of testing for impairment, operating lease assets are grouped at the lowest level the Company can reasonably estimate cash flows. When impairment conditions are met, impairment losses are measured by the amount carrying values exceed their fair values.
(g)Allowance for Credit Losses
The allowance for credit losses is management’s estimate of probable losses incurred on finance receivables and is evaluated, at minimum, on a quarterly basis. The retail loan and direct financing lease portfolio segments consistsegment consists primarily of pools of homogeneous loans and leases with relatively small balances, which are collectively evaluated for impairment. Dealer loans are individually evaluated for impairment when specifically identified as impaired. Dealer loans that have not been specifically identified as impaired are collectively evaluated. An allowance for credit losses is also maintained for estimated probable losses incurred on past due operating lease rental payments.

F-10


(h)
Determination of Lease Residual Values
Contractual residual values of lease vehicles are determined at lease inception based on expectations of end of term used vehicle values, taking into consideration external industry data and the Company’s own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealers are sold through online and physical auctions. The Company is exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of lease term. The Company assesses the estimated end of term market values of the lease vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles the Company expects to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends, and market information on new and used vehicles.
For operating leases, adjustments to the estimated residual values are made on a straight-line basis over the remaining term of the lease and recognized as depreciation expense. For direct financing leases, downward adjustments for declines in estimated residual values deemed other-than-temporary are recognized as a loss in the period in which the estimate changed.
(i)Vehicles Held for Disposition
Vehicles held for disposition consist of returned and repossessed vehicles. The vehicles are either sold at used vehicle auctions or purchased by dealers, usually within two months of return or repossession. The vehicles are valued at the lower of their carrying value or estimated fair value, less estimated disposition costs. For returned vehicles, valuation adjustments are recorded as a charge against the gain/loss on disposition of lease vehicles. Valuation adjustments made for repossessed collateral of finance receivables and operating leases are recognized as charges to the allowance for credit loss and estimated early termination losses on operating leases, respectively.
(j)Vehicle Service Contract Administration
AHFC performs administrative services for vehicle service contracts (VSC) issued by AHM and its subsidiary, American Honda Protection Products Corporation. AHFC receives fees for performing the services when the contracts are acquired, which is recognized in other income over the lives of the underlying contracts, proportionate to the anticipated amount of service to be performed. HCFI performs marketing services for vehicle service contracts issued by HCI. HCFI receives fees as the services are performed, which is recognized in other income.
(k)Securitizations and Variable Interest Entities
The Company enters into securitization transactions for funding purposes. Securitization transactions involve transferring pools of the Company’s retail loans and operating leases to statutory trusts.bankruptcy-remote SPEs. The trustsSPEs are special purpose entities formed by the Companyestablished to accommodate securitization structures. Securitization trustsstructures, which have the limited purpose of acquiring assets, issuing asset-backed securities, and making payments on the securities. Assets transferred to securitization trustsSPEs are considered legally isolated from the Company and the claims of the Company’s creditors. The Company continues to service the retail loans and operating leases transferred to the trusts.SPEs. Investors in the notes issued by the trustsa SPE only have recourse to the assets of the trustssuch SPE and do not have recourse to the general creditassets of AHFC, HCFI, or our other subsidiaries or to other SPEs. The assets of SPEs are the Company.only source for repayment on the notes.

F-11


The Company’s securitizations are structured to provide credit enhancements to investors in notes issued by the trusts.SPEs. Credit enhancements can include the following:
Subordinated certificates Securitiessecurities issued by the trusts, whichSPEs that are retained by the Company and are subordinated in priority of payment to the notes.
Overcollateralization Principal balance of securitized assetsasset balances that exceed the balance of securities issued by the trust.SPEs.
Excess interest Excessexcess interest collections canto be used to cover losses on defaulted loans.
Reserve funds Restrictedrestricted cash accounts held by the trustsSPEs to cover shortfalls in payments of interest and principal required to be paid on the notes.
Yield supplement accounts Restrictedrestricted cash accounts held by the trustsSPEs to supplement interest payments on notes.
The risk retention regulations in Regulation RR of the Securities Exchange Act of 1934, as amended, require the sponsor to retain an economic interest in the credit risk of the securitized receivables,assets, either directly or through one or more majority-owned affiliates. Standard risk retention options allow the sponsor to retain either an eligible vertical interest, an eligible horizontal residual interest, or a combination of both. The Company has satisfied this obligation by retaining an eligible vertical interest of an amount equal to at least 5% of the principal amount of each class of note and certificate issued for the securitization transaction that was subject to this rule but may choose to use other structures in the future.
The securitization trustsSPEs formed by the Company are VIEs, which are required to be consolidated by their primary beneficiary. The Company is considered to be the primary beneficiary of these trustsSPEs due to (i) the power to direct the activities of the trustsSPEs that most significantly impact the trusts’SPEs economic performance through its role as servicer, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the trustsSPEs through the subordinated certificates and residual interest retained.
Consolidation of these trustsSPEs results in the securitization transactions being accounted for as on-balance sheet secured financings. The securitized receivablesretail loans and operating leases remain on the consolidated balance sheet of the Company along with the notes issued by the trusts.SPEs. The notes are secured solely by the assets of the trustsSPEs and not by any other assets of the Company. The assets of the trustsSPEs are the only source of funds for repayment on the notes. Restricted cash accounts held by the trustsSPEs can only be used to support payments on the notes. The restricted cash accounts are included in the Company’s consolidated balance sheet in other assets. The Company recognizes finance revenue from retail loans and operating leases and provisions for credit losses and uncollectible operating leases on the securitized receivablesassets and interest expense on the related secured debt.
(l)Income Taxes
The Company’s U.S. entities are included in the consolidated U.S. federal and many consolidated or combined state and local income tax returns of the Parent, though in some cases the Company files separately as required by certain state and local jurisdictions. The Company provides its share of the consolidated or combined income tax on a modified separate return basis pursuant to an intercompany income tax allocation agreement that it has entered into with the Parent. The Company files a separate California return based on California’s worldwide income and apportionment rules. To the extent the Company’s U.S. entities have taxable losses in its consolidated federal, and consolidated or combined state and local tax returns, a benefit will be recognized to the extent that it is more likely than not that these losses will be utilized by the consolidated or combined return group in the current or future year and thus would be subject to current or future reimbursement by the Parent under the terms of the intercompany income tax allocation agreement. To the extent such losses are attributable to a state where the Company files a separate return, a benefit for such losses would be recognized to the extent such losses are more likely than not to be utilized in the future. All but an insignificant amount of the federal and state taxes payable or receivable shown on the consolidated balance sheets are due to or from the Parent, pursuant to the intercompany income tax allocation agreement.

F-12


The Company’s Canadian subsidiary, HCFI, files Canadian federal and provincial income tax returns based on the separate legal entity financial statements. HCFI does not file U.S. federal, state, or local income tax returns. Consequently, HCFI does not participate in the intercompany income tax allocation agreement that the Company has with the Parent.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income during the period in which the enactment date occurs. A valuation allowance is provided to offset deferred tax assets if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In addition, tax benefits related to positions considered uncertain are recognized only if, based on the technical merits of the issue, the Company believes that it is more likely than not to sustain the position and then at the largest amount that is greater than 50% likely to be realized upon settlement.
(m)Foreign Currency Translation
Upon consolidation, the assets and liabilities of HCFI are translated at year-end exchange rates, and the revenues and expenses are translated at the average rates of exchange during the respective years. The resulting translation adjustment is included in other comprehensive income and the cumulative translation adjustment is reported as a separate component of equity in accumulated other comprehensive income and noncontrolling interest.
Foreign currency denominated debt is translated at year-end exchange rates, and the foreign currency transaction gains and losses are recognized through earnings.
(n)Derivative Instruments
The Company utilizes derivative instruments to manage exposures to interest rate and foreign currency risks. The Company’s assets consist primarily of fixed rate receivables and operating lease assets. The Company’s liabilities consist of both floating and fixed rate debt, denominated in various currencies. Interest rate and basis swaps are used to match the interest rate characteristics of the Company’s assets and debt. Currency swaps are used to manage currency risk exposure on foreign currency denominated debt. Derivative instruments are not used for trading or any other speculative purposes.
All derivative financial instruments are recorded on the consolidated balance sheets at fair value. The Company elects to present derivative instruments in the Company’s consolidated balance sheets on a gross basis rather than on a net basis by counterparty. Refer to Note 5 for additional information. Except in very limited circumstances involving counterparties with consolidated securitization trusts,SPEs, AHFC generally has not entered into credit support (collateral) agreements with its counterparties. Changes in the fair value of derivatives are recognized in earnings in the period of the change. In Canada, HCFI is a party to credit support agreements that require posting of cash collateral to mitigate credit risk on derivative positions.

(o)Recently Adopted Accounting Standards
Effective April 1, 2018,2019, the Company adopted Accounting Standard Update (ASU) 2014-09 and the subsequent ASUs that modified ASU 2014-09, which have been codified in Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The Company’s primary sources of revenue are from lease and loan contracts, which are not within the scope of ASC 606 as they are within the scope of other accounting standards. All of the Company’s other revenue sources that are within the scope of ASC 606 are insignificant, with the exception of revenue from Vehicle Service Contract Administration. The adoption of this standard did not change the timing or amount of revenue from Vehicle Service Contract Administration, see Note 6-Transactions Involving Related Parties. Gains or losses related to the sale of lease vehicles are within the scope of ASC 610-20. The adoption of this standard did not have an impact on the timing or amount of gains or losses from the disposition of lease vehicles. ASU 2014-09 was adopted using the modified retrospective transition method. The adoption of this standard did not require any adjustments to opening retained earnings as of April 1, 2018.
Effective April 1, 2018, the Company adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The adoption of this standard did not have a material impact on the consolidated financial statements.
Effective April 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this standard did not have a material impact on the consolidated statements of cash flows.
Effective April 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents, and that an entity disclose information about the nature of such restricted amounts. The Company’s restricted cash consists primarily of reserve funds and yield supplement accounts held in securitization trusts. Net changes in these restricted cash balances are currently reported within investing activities in the Company’s consolidated statements of cash flows. Under the amended guidance, transfers between restricted and unrestricted cash accounts are not reported as cash flows. The amendments in this update require that amounts classified as restricted cash and restricted cash equivalents be included within the beginning-of-period and end-of-period amounts along with cash and cash equivalents on the statement of cash flows. The amendments were applied retrospectively to all periods presented within the consolidated statements of cash flows.
(p)Recently Issued Accounting Standards
In February 2016, the FASB issued 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 supersedes the guidance in ASC 840, Leases. The FASB also issued several updates to ASU 2016-02 with targeted improvements and clarifications. The new standard will requireallows the Company to recordnot 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 and lease liabilities for the current operating leases as a lessee. Upon adoption of this standard, the Company expects to recognize right-of-use assets of approximately $56 million, lease liabilities of approximately $62 million, and a reduction in other liabilities of approximately $6 million for accrued rent and unamortized tenant improvement allowances. 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.

F-13


Lessor accounting remains largely unchanged except for limited amendments impacting the following limited amendments. Changes inCompany’s income statement classification of the assessment of collectibility onfollowing: (i) the Company has elected to record the general allowance for uncollectible operating lease receivables are requiredthrough a reduction to be recognized as adjustments to lease revenue rather than through thea provision for credit losses. Certainloss, (ii) lessor costs, such as property taxes, paid directly to third parties and reimbursed by lesseeslessee which were presented net are required to benow recognized gross as anrevenue and expense, and lease revenue. Initial(iii) the amortization of initial direct costs which werewas previously recognized as a reduction of lease revenue will beis now presented as an expense. These changes in lessorThe 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 will not have an impact on net income. The new standard is effective for the Company beginningpolicies.
Effective April 1, 2019, and will be adopted using the modified retrospective method. The adoption of the new standard will not have a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB also issued several updates to ASU 2016-13 with targeted improvements and clarifications. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company is currently assessing the impact of this standard on the consolidated financial statements. In general, the allowance for credit losses is expected to increase when changing from an incurred loss to expected loss methodology. The models and methodologies that are currently used in estimating the allowance for credit losses are being evaluated to identify the changes necessary to meet the requirements of the new standard. The amendments are effective for the Company beginning April 1, 2020.
In August 2017, the FASB issuedadopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which addresses better alignment betweenaligns 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 amendments are effective for the Company beginning April 1, 2019. The adoption of this standard willdid not impact the Company’s consolidated financial statements since there were no designated hedge accounting relationships.
(p)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 adopted the new standard and related amendments effective April 1, 2020 on a modified retrospective basis. The allowance for credit losses will increase by approximately $100 million, primarily for retail loans. The after-tax cumulative-effect reduction to opening retained earnings and noncontrolling interest will be approximately $75 million. In general, the provision for credit losses in future periods is expected to have greater volatility under the new standard given the longer forecast period of lifetime expected credit losses.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-ChangesFramework—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-ChapterReporting—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 amendments areCompany adopted the new guidance effective for the Company beginning April 1, 2020. Early adoption is permitted.
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, 2020.2021.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts or other transactions affected by reference rate reform if certain criteria are met. The guidance is effective immediately and may be applied prospectively through December 31, 2022. The Company is evaluating applicable contracts and transactions to determine whether to elect the optional guidance.




F-14


(2)
Finance Receivables
Finance receivables consisted of the following:
March 31, 2019March 31, 2020
Lease Retail Dealer TotalRetail Dealer Total
            
(U.S. dollars in millions)(U.S. dollars in millions)
Finance receivables$30
 $35,429
 $5,835
 $41,294
$34,623
 $5,606
 $40,229
Allowance for credit losses
 (193) (8) (201)(364) (6) (370)
Write-down of lease residual values(2) 
 
 (2)
Deferred dealer participation and other deferred costs
 431
 
 431
441
 
 441
Unearned subsidy income
 (1,098) 
 (1,098)(746) 
 (746)
Finance receivables, net$28
 $34,569
 $5,827
 $40,424
$33,954
 $5,600
 $39,554

March 31, 2018March 31, 2019
Lease Retail Dealer TotalRetail Dealer Total
            
(U.S. dollars in millions)(U.S. dollars in millions)
Finance receivables$154
 $33,140
 $5,495
 $38,789
$35,457
 $5,835
 $41,292
Allowance for credit losses
 (179) 
 (179)(193) (8) (201)
Write-down of lease residual values(9) 
 
 (9)
Unearned interest income and fees(2) 
 
 (2)
Deferred dealer participation and other deferred costs
 396
 
 396
431
 
 431
Unearned subsidy income(2) (1,037) 
 (1,039)(1,098) 
 (1,098)
Finance receivables, net$141
 $32,320
 $5,495
 $37,956
$34,597
 $5,827
 $40,424
Finance receivables include retail loans with a principal balancenet carrying amount of $9.4$9.6 billion and $9.1 billion as of March 31, 20192020 and 2018,2019, respectively, which have been transferred to securitization trustsbankruptcy-remote SPEs and are considered to be legally isolated but do not qualify for sale accounting treatment. These finance receivablesretail loans are restricted as collateral for the payment of the related secured debt obligations. Refer to Note 10 for additional information.
Contractual maturities of direct financing lease and retail loans at March 31, 20192020 were as follows:
Lease Retail
   
(U.S. dollars in millions)
Year ending March 31,   
(U.S. dollars in millions)

2020$30
 $9,980
2021
 8,912
$10,034
2022
 7,413
8,980
2023
 5,402
7,234
2024
 2,934
4,956
20252,538
Thereafter
 788
881
Total$30
 $35,429
$34,623
It is the Company’s experience that a portion of the finance receivable portfolio generally is repaid before contractual maturity dates. Aggregate contractual maturities, as shown above for direct financing lease and retail finance receivables, should not be regarded as a forecast of future cash collections.
The uninsured portions of the direct financing lease residual values were $8 million and $35 million at March 31, 2019 and 2018, respectively. Included in the gain or loss on disposition of lease vehicles are end of term charges on both direct financing and operating leases of $70 million, $63 million and $42 million for the fiscal years ended March 31, 2019, 2018 and 2017, respectively.
F-15


Credit Quality of FinancingFinance Receivables
Credit losses are an expected cost of extending credit. The majority of theour 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 and direct financing lease portfolio segmentssegment 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 at loan inception, 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.
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 dealershipthe 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 loansloan contracts that constituted troubled debt restructurings during the fiscal years ended March 31, 2020, 2019 2018 and 2017.2018.
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 fiscal years ended March 31, 2020, 2019 2018 and 2017.2018. The Company does allow limited payment deferrals on consumer finance receivables. However, thesePayment deferrals were also granted to customers impacted by COVID-19. These payment deferrals are not consideredtreated as troubled debt restructurings since the deferrals are deemed insignificant and interest continues to accrue during the deferral period.

F-16


The following is a summary of the activity in the allowance for credit losses of finance receivables, excluding the provisions related to past due operating leases:receivables:
Year ended March 31, 2019Year ended March 31, 2020
Lease Retail Dealer TotalRetail Dealer Total
            
(U.S. dollars in millions)(U.S. dollars in millions)
Beginning balance$
 $179
 $
 $179
$193
 $8
 $201
Provision
 202
 7
 209
388
 14
 402
Charge-offs
 (279) (1) (280)(317) (17) (334)
Recoveries
 91
 2
 93
100
 1
 101
Effect of translation adjustment
 
 
 

 
 
Ending balance$
 $193
 $8
 $201
$364
 $6
 $370
Allowance for credit losses – ending balance:            
Individually evaluated for impairment$
 $
 $8
 $8
$
 $1
 $1
Collectively evaluated for impairment
 193
 
 193
364
 5
 369
Finance receivables – ending balance:            
Individually evaluated for impairment$
 $
 $150
 $150
$
 $10
 $10
Collectively evaluated for impairment30
 34,762
 5,685
 40,477
34,318
 5,596
 39,914
 Year ended March 31, 2019
 Retail Dealer Total
      
 (U.S. dollars in millions)
Beginning balance$179
 $
 $179
Provision202
 7
 209
Charge-offs(279) (1) (280)
Recoveries91
 2
 93
Effect of translation adjustment
 
 
Ending balance$193
 $8
 $201
Allowance for credit losses – ending balance:     
Individually evaluated for impairment$
 $8
 $8
Collectively evaluated for impairment193
 
 193
Finance receivables – ending balance:     
Individually evaluated for impairment$
 $150
 $150
Collectively evaluated for impairment34,790
 5,685
 40,475

F-17


 Year ended March 31, 2018
 Lease Retail Dealer Total
        
 (U.S. dollars in millions)
Beginning balance$1
 $132
 $
 $133
Provision
 211
 2
 213
Charge-offs(1) (243) (2) (246)
Recoveries
 79
 
 79
Effect of translation adjustment
 
 
 
Ending balance$
 $179
 $
 $179
Allowance for credit losses – ending balance:       
Individually evaluated for impairment$
 $
 $
 $
Collectively evaluated for impairment
 179
 
 179
Finance receivables – ending balance:       
Individually evaluated for impairment$
 $
 $128
 $128
Collectively evaluated for impairment150
 32,499
 5,367
 38,016
Year ended March 31, 2017Year ended March 31, 2018
Lease Retail Dealer TotalRetail Dealer Total
            
(U.S. dollars in millions)(U.S. dollars in millions)
Beginning balance$2
 $91
 $
 $93
$133
 $
 $133
Provision1
 186
 
 187
211
 2
 213
Charge-offs(2) (224) 
 (226)(244) (2) (246)
Recoveries
 79
 
 79
79
 
 79
Effect of translation adjustment
 
 
 

 
 
Ending balance$1
 $132
 $
 $133
$179
 $
 $179
Allowance for credit losses – ending balance:            
Individually evaluated for impairment$
 $
 $
 $
$
 $
 $
Collectively evaluated for impairment1
 132
 
 133
179
 
 179
Finance receivables – ending balance:            
Individually evaluated for impairment$
 $
 $1
 $1
$
 $128
 $128
Collectively evaluated for impairment392
 30,655
 5,005
 36,052
32,649
 5,367
 38,016
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
30 – 59 days
past due
 
60 – 89 days
past due
 
90 days
or greater
past due
 
Total
past due
 
Current or
less than 30
days past due
 
Total
finance
receivables
                      
(U.S. dollars in millions)(U.S. dollars in millions)
March 31, 2020           
Retail loans:           
New auto$222
 $50
 $13
 $285
 $27,495
 $27,780
Used and certified auto84
 20
 5
 109
 5,174
 5,283
Motorcycle and other12
 4
 2
 18
 1,237
 1,255
Total retail318
 74
 20
 412
 33,906
 34,318
Dealer loans:           
Wholesale flooring1
 
 
 1
 4,529
 4,530
Commercial loans
 
 
 
 1,076
 1,076
Total dealer loans1
 
 
 1
 5,605
 5,606
Total finance receivables$319
 $74
 $20
 $413
 $39,511
 $39,924
March 31, 2019                      
Retail loans:                      
New auto$213
 $41
 $10
 $264
 $28,494
 $28,758
$214
 $41
 $10
 $265
 $28,521
 $28,786
Used and certified auto70
 14
 4
 88
 4,712
 4,800
70
 14
 4
 88
 4,712
 4,800
Motorcycle and other12
 3
 2
 17
 1,187
 1,204
12
 3
 2
 17
 1,187
 1,204
Total retail295
 58
 16
 369
 34,393
 34,762
296
 58
 16
 370
 34,420
 34,790
Direct financing leases1
 
 
 1
 29
 30
Dealer loans:                      
Wholesale flooring1
 
 17
 18
 4,668
 4,686
1
 
 17
 18
 4,668
 4,686
Commercial loans51
 
 17
 68
 1,081
 1,149
51
 
 17
 68
 1,081
 1,149
Total dealer loans52
 
 34
 86
 5,749
 5,835
52
 
 34
 86
 5,749
 5,835
Total finance
receivables
$348
 $58
 $50
 $456
 $40,171
 $40,627
$348
 $58
 $50
 $456
 $40,169
 $40,625
March 31, 2018           
Retail loans:           
New auto$188
 $35
 $10
 $233
 $27,034
 $27,267
Used and certified auto59
 11
 2
 72
 3,967
 4,039
Motorcycle and other10
 3
 2
 15
 1,178
 1,193
Total retail257
 49
 14
 320
 32,179
 32,499
Direct financing leases2
 
 
 2
 148
 150
Dealer loans:           
Wholesale flooring2
 1
 2
 5
 4,447
 4,452
Commercial loans
 
 
 
 1,043
 1,043
Total dealer loans2
 1
 2
 5
 5,490
 5,495
Total finance
receivables
$261
 $50
 $16
 $327
 $37,817
 $38,144

F-18


Credit Quality Indicators
Retail Loan and Direct Financing Lease Portfolio SegmentsSegment
The Company utilizes proprietary credit scoring systems to evaluate the credit risk of applicants for retail loans and leases.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 and lease 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. In addition, principal balances of finance receivables for which payments were deferred due to COVID-19 are still considered to be performing. The table below presents the Company’s portfolio of retail loans and direct financing leases by this credit quality indicator:
Retail
new auto loans
 
Retail
used and
certified auto loans
 
Retail
motorcycle
and other loans
 
Direct
financing
lease
 
Total consumer
finance
receivables
Retail
new auto loans
 
Retail
used and
certified auto loans
 
Retail
motorcycle
and other loans
 
Total consumer
finance
receivables
                
(U.S. dollars in millions)(U.S. dollars in millions)
March 31, 2020       
Performing$27,717
 $5,258
 $1,249
 $34,224
Nonperforming63
 25
 6
 94
Total$27,780
 $5,283
 $1,255
 $34,318
March 31, 2019                
Performing$28,707
 $4,782
 $1,199
 $30
 $34,718
$28,735
 $4,782
 $1,199
 $34,716
Nonperforming51
 18
 5
 
 74
51
 18
 5
 74
Total$28,758
 $4,800
 $1,204
 $30
 $34,792
$28,786
 $4,800
 $1,204
 $34,790
March 31, 2018         
Performing$27,222
 $4,026
 $1,188
 $150
 $32,586
Nonperforming45
 13
 5
 
 63
Total$27,267
 $4,039
 $1,193
 $150
 $32,649
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 tablestable below. Group A includes the loans of dealerships with the strongest internal risk rating. Group B includes the loans of all remaining dealers.
March 31,March 31,
2019 20182020 2019
Wholesale
flooring
 
Commercial
loans
 Total 
Wholesale
flooring
 
Commercial
loans
 Total
Wholesale
flooring
 
Commercial
loans
 Total 
Wholesale
flooring
 
Commercial
loans
 Total
                      
(U.S. dollars in millions)(U.S. dollars in millions)
Group A$3,121
 $823
 $3,944
 $2,791
 $684
 $3,475
$2,857
 $856
 $3,713
 $3,121
 $823
 $3,944
Group B1,565
 326
 1,891
 1,661
 359
 2,020
1,672
 221
 1,893
 1,565
 326
 1,891
Total$4,686
 $1,149
 $5,835
 $4,452
 $1,043
 $5,495
$4,529
 $1,077
 $5,606
 $4,686
 $1,149
 $5,835

F-19


(3)Investment in Operating Leases
Investment in operating leases consisted of the following:
March 31,March 31,
2019 20182020 2019
      
(U.S. dollars in millions)(U.S. dollars in millions)
Operating lease vehicles$42,427
 $41,285
$43,624
 $42,427
Accumulated depreciation(8,262) (8,169)(8,219) (8,262)
Deferred dealer participation and other deferred costs119
 117
Deferred dealer participation and initial direct costs131
 119
Unearned subsidy income(1,563) (1,317)(1,376) (1,563)
Estimated early termination losses(115) (99)(317) (115)
Investment in operating leases, net$32,606
 $31,817
$33,843
 $32,606

Operating lease revenue consisted of the following:
 Years ended March 31,
 2020 2019 2018
      
 (U.S. dollars in millions)
Lease payments$6,713
 $6,395
 $6,127
Subsidy income and dealer rate participation, net (1)
968
 858
 763
Reimbursed lessor costs (2)
68
 
 
Total operating lease revenue, net$7,749
 $7,253
 $6,890
________________________
(1) Includes amortization of initial direct costs during the fiscal years ended March 31, 2019 and 2018.
(2) Reimbursed lessor costs were presented net during the fiscal years ended March 31, 2019 and 2018.
Leased vehicle expenses consisted of the following:
 Years ended March 31,
 2020 2019 2018
      
 (U.S. dollars in millions)
Depreciation expense$5,705
 $5,520
 $5,481
Initial direct costs and other lessor costs (1)
141
 
 
Gain on disposition of leased vehicles (2)
(153) (131) (90)
Total leased vehicle expenses, net$5,693
 $5,389
 $5,391
________________________
(1) Amortization of initial direct costs was presented as a reduction to lease revenue and reimbursed lessor costs were presented net during the fiscal years ended March 31, 2019 and 2018.
(2) Included in the gain on disposition of leased vehicles are end of term charges of $73 million, $70 million and $63 million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively.

Investment in operating leases includes lease assets with a net carrying amount of $493 million as of March 31, 2020, 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.

F-20


Contractual operating lease payments due as of March 31, 2020 are summarized below. Based on the Company's experience, it is expected that a portion of the Company's operating leases will terminate prior to the scheduled lease term. The summary below should not be regarded as a forecast of future cash collections.
Year ending March 31,
(U.S. dollars in millions)

2021$5,854
20224,042
20231,561
2024250
202552
Total$11,759
The Company recognized $101331 million, $108$101 million and $73$108 million of estimated early termination losses due to lessee defaults for the fiscal years ended March 31, 2020, 2019 2018 and 2017,2018, respectively. Actual net losses realized for the fiscal years ended March 31, 2020, 2019 and 2018 and 2017 totaled $129 million, $85 million $80 million and $62$80 million, respectively.
Included inThe general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $28 million for the fiscal year ended March 31, 2020. The general allowance for uncollectible operating lease receivables was recorded through a provision for credit losses of $40 million and $31 million for the fiscal years ended March 31, 2019 and 2018, respectively.
During the fiscal year ended March 31, 2020, the Company considered the impact of COVID-19 on estimated residual values and 2017 are provisions related to past due receivablesdetermined that impairment conditions were not met. No impairment losses on operating leases inwere recognized during the amounts of $40 million, $31 million and $23 million, respectively.
fiscal year ended March 31, 2020. The Company recognized $14$14 million of impairment losses on operating leases due to lower estimated residual values of certain models of leased vehicles for the fiscal year ended March 31, 2019. No impairment losses on operating leases were recognized during the fiscal yearsyear ended March 31, 2018, and 2017.2018.
Future minimum rental payments for operating leases at March 31, 2019 were as follows (U.S. dollars in millions):
Year ending March 31, 
2020$5,476
20213,665
20221,514
2023246
202450
Total$10,951
Based on the Company’s leasing experience, it is expected that a portion of the Company’s operating lease vehicles will be purchased by the lessee prior to the scheduled lease term. Future minimum rental payments, as shown above, should not be regarded as a forecast of future cash collections.

(4)Debt
The Company issues debt in various currencies with both floating and fixed interest rates. Outstanding debt net of discounts and fees, weighted average contractual interest rates and range of contractual interest rates were as follows:
    
Weighted average
contractual interest rate
 
Contractual
interest rate ranges
    
Weighted average
contractual interest rate
 Contractual
interest rate ranges
March 31, March 31, March 31,March 31, March 31, March 31,
2019 2018 2019 2018 2019 20182020 2019 2020 2019 2020
2019
                
(U.S. dollars in millions)     (U.S. dollars in millions)     
Unsecured debt:                
Commercial paper$5,755
 $5,167
 2.60% 1.86% 1.79 - 2.71% 1.07 - 2.21%$5,490
 $5,755
 1.81% 2.60% 1.01 - 2.31%
1.79 - 2.71%
Related party debt749
 1,085
 2.18% 1.64% 2.02 - 2.31% 1.43 - 1.72%533
 749
 1.76% 2.18% 1.45 - 2.06%
2.02 - 2.31%
Bank loans4,962
 5,419
 3.16% 2.48% 2.35 - 3.50% 2.02 - 3.15%4,938
 4,962
 2.16% 3.16% 1.44 - 2.55%
2.35 - 3.50%
Private MTN program999
 1,698
 3.84% 5.40% 3.80 - 3.88% 3.80 - 7.63%999
 999
 3.84% 3.84% 3.80 - 3.88%
3.80 - 3.88%
Public MTN program24,117
 21,398
 2.35% 1.92% 0.35 - 3.63% 0.07 - 3.50%25,130
 24,117
 2.07% 2.35% 0.35 - 3.63%
0.35 - 3.63%
Euro MTN programme868
 1,111
 1.89% 1.95% 1.88 - 2.23% 1.88 - 2.33%28
 868
 2.23% 1.89% 2.23 - 2.23%
1.88 - 2.23%
Other debt3,514
 3,250
 2.50% 2.20% 1.63 - 3.44% 1.63 - 2.76%3,266
 3,514
 2.47% 2.50% 1.73 - 3.44%
1.63 - 3.44%
Total unsecured debt40,964
 39,128
     40,384
 40,964
     
Secured debt8,790
 8,733
 2.42% 1.74% 1.16 - 3.30% 1.04 - 2.83%9,748
 8,790
 2.25% 2.42% 1.36 - 3.30%
1.16 - 3.30%
Total debt$49,754
 $47,861
     $50,132
 $49,754
     

F-21


As of March 31, 2020, the outstanding principal balance of long-term debt with floating interest rates totaled $13.0 billion, long-term debt with fixed interest rates totaled $30.0 billion, and short-term debt with floating and fixed interest rates totaled $7.3 billion. As of March 31, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $12.5$12.5 billion,, long-term debt with fixed interest rates totaled $29.2 billion, and short-term debt totaled $8.1 billion. As of March 31, 2018, the outstanding principal balance of long-term debt with floating interest rates totaled $13.2 billion, long-term debt withand fixed interest rates totaled $27.8 billion, and short-term debt totaled $7.0$8.1 billion.
The Company’s secured debt is amortizing and unsecured debt is non-amortizing. Scheduled and projected maturities of the Company’s debt at March 31, 20192020 are summarized below:
2020 2021 2022 2023 2024 Thereafter Total2021 2022 2023 2024 2025 Thereafter Total
                          
(U.S. dollars in millions)(U.S. dollars in millions)
Unsecured debt:                          
Commercial paper$5,773
 $
 $
 $
 $
 $
 $5,773
$5,498
 $
 $
 $
 $
 $
 $5,498
Related party debt749
 
 
 
 
 
 749
533
 
 
 
 
 
 533
Bank loans1,562
 1,337
 1,300
 693
 
 75
 4,967
1,719
 1,484
 1,067
 200
 471
 
 4,941
Private MTN program
 500
 500
 
 
 
 1,000
500
 500
 
 
 
 
 1,000
Public MTN program6,300
 6,400
 3,805
 3,705
 2,961
 1,000
 24,171
6,700
 5,285
 6,245
 4,201
 1,250
 1,500
 25,181
Euro MTN programme841
 
 
 27
 
 
 868

 
 28
 
 
 
 28
Other debt450
 862
 524
 899
 412
 375
 3,522
818
 498
 853
 391
 356
 356
 3,272
Total unsecured debt15,675
 9,099
 6,129
 5,324
 3,373
 1,450
 41,050
15,768
 7,767
 8,193
 4,792
 2,077
 1,856
 40,453
Secured debt (1)
4,678
 2,573
 1,222
 288
 42
 
 8,803
5,089
 2,944
 1,463
 266
 
 
 9,762
Total debt (2)
$20,353
 $11,672
 $7,351
 $5,612
 $3,415
 $1,450
 $49,853
$20,857
 $10,711
 $9,656
 $5,058
 $2,077
 $1,856
 $50,215
Unamortized discounts/fees            (99)            (83)
Total debt, net            $49,754
            $50,132
_____________________________________________________
(1)Projected repayment schedule of secured debt. Reflects payment performance assumptions on underlying receivables.
(2)Principal amounts.

(1)Projected repayment schedule of secured debt. Reflects payment performance assumptions on underlying assets.
(2)Principal amounts.
Commercial Paper
As of March 31, 20192020 and 2018,2019, the Company had commercial paper programs that provide the Company with available funds of up to $8.5$8.8 billion and $8.6$8.5 billion, respectively, at prevailing market interest rates for terms up to one year. The commercial paper programs are supported by the Keep Well Agreements with HMC described in Note 6.
Outstanding commercial paper averaged $5.5 billion during fiscal year 2020 and $5.6 billion during both fiscal years 2019 and 2018.year 2019. The maximum balance outstanding at any month-end during both fiscal years 20192020 and 20182019 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 $14 million, $16 million $14 million and $12$14 million for the fiscal years ended March 31, 2020, 2019 2018 and 2017,2018, respectively.
Bank Loans
Outstanding bank loans at March 31, 20192020 and 20182019 were either short-term or long-term, with floating or fixed interest rates, and denominated in U.S. dollars or Canadian dollars. Outstanding bank loans have prepayment options. No outstanding bank loans as of March 31, 20192020 and 20182019 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.

F-22


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 March 31, 20192020 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.
Public MTN Program
In August 2016,2019, AHFC filedrenewed its Public MTN program by filing a registration statement with the SEC under which it may issue from time to time up to $30.0 billion aggregate principal amount of Public MTNs.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 thisthe Public MTN program as of March 31, 20192020 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. Notes under this program that are currently listed on the Luxembourg Stock Exchange will remain listed through their maturities. NotesAHFC has one note outstanding under this program as of March 31, 2019 were long-term with2020. The note has a maturity date of February 21, 2023, a fixed interest rates. Notes under this program wererate 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 March 31, 20192020 and 20182019 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.SPEs. Notes outstanding as of March 31, 20192020 and 20182019 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.retail loans and operating leases. Refer to Note 10 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 364-day credit agreement, which expires on February 28, 2020,26, 2021, a $2.1 billion credit agreement, which expires on March 3, 2021,February 28, 2023, and a $1.4 billion credit agreement, which expires on March 3, 2023.February 28, 2025. As of March 31, 2019,2020, no amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.
HCFI maintains a $1.21.4 billion syndicated bank credit facility which provides that HCFI may borrow up to $599711 million on a one-year revolving basis and up to $599$711 million on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 20202021 and the five-year tranche of the credit agreement expires on March 25, 2024.2025. As of March 31, 2019,2020, no amounts were drawn upon under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the expiration date of each respective tranche.

F-23


The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales.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 multipletwo banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales. As of March 31, 2019,2020, no amounts were drawn upon under these agreements. These agreements expire in September 2019.2020. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates.
(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 14 regarding the valuation of derivative instruments.
 March 31,
 2019 2018
 
Notional
balances
 Assets Liabilities 
Notional
balances
 Assets Liabilities
            
 (U.S. dollars in millions)
Interest rate swaps$58,132
 $308
 $307
 $56,043
 $465
 $342
Cross currency swaps5,002
 72
 261
 4,310
 285
 72
Gross derivative assets/liabilities  380
 568
   750
 414
Counterparty netting adjustment  (313) (318)   (372) (371)
Net derivative assets/liabilities  $67
 $250
   $378
 $43

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.
 Year ended March 31,
 2019 2018 2017
      
 (U.S. dollars in millions)
Interest rate swaps$(23) $126
 $(87)
Cross currency swaps(486) 424
 (228)
Total gain/(loss) on derivative instruments$(509) $550
 $(315)
The fair value of derivative instruments is subject to the fluctuations in market interest rates and foreign currency exchange rates. Since the Company has elected not to apply hedge accounting, the volatility in the changes in fair value of these derivative instruments is recognized in earnings. All settlements of derivative instruments are presented within cash flows from operating activities in the consolidated statements of cash flows.
These derivative instruments also contain an element of credit risk in the event the counterparties are unable to meet the terms of the agreements. However, the Company minimizes the risk exposure by limiting the counterparties to major financial institutions that meet established credit guidelines. In the event of default, all counterparties are subject to legally enforceable master netting agreements. In Canada, HCFI is a party to reciprocal credit support agreements that require posting of cash collateral to mitigate counterparty credit risk on derivative positions. Posted collateral is recognized in other assets and held collateral is recognized in other liabilities.
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 14 regarding the valuation of derivative instruments.
 March 31,
 2020 2019
 
Notional
balances
 Assets Liabilities 
Notional
balances
 Assets Liabilities
            
 (U.S. dollars in millions)
Interest rate swaps$57,379
 $704
 $830
 $58,132
 $308
 $307
Cross currency swaps4,001
 44
 142
 5,002
 72
 261
Gross derivative assets/liabilities  748
 972
   380
 568
Collateral posted/held  45
 9
   8
 3
Counterparty netting adjustment  (764) (764)   (321) (321)
Net derivative assets/liabilities  $29
 $217
   $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.
 Years ended March 31,
 2020 2019 2018
      
 (U.S. dollars in millions)
Interest rate swaps$(127) $(23) $126
Cross currency swaps(178) (486) 424
Total gain/(loss) on derivative instruments$(305) $(509) $550


F-24


(6)Transactions Involving Related Parties
The following tables summarize the income statement and balance sheet impact of transactions with the Parent and affiliated companies:
Years ended March 31,Years ended March 31,
Income Statement2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Revenue:          
Subsidy income$1,633
 $1,441
 $1,232
$1,639
 $1,633
 $1,441
Interest expense:          
Related party debt16
 14
 15
14
 16
 14
Other income, net:          
VSC administration fees109
 107
 103
109
 109
 107
Support Service Fee(34) (28) 
(36) (34) (28)
General and administrative expenses:          
Support Compensation Agreement fees23
 22
 20
68
 23
 22
Benefit plan expenses11
 11
 11
10
 11
 11
Shared services67
 62
 60
70
 67
 62
March 31,March 31,
Balance Sheet2019 20182020 2019
      
(U.S. dollars in millions)(U.S. dollars in millions)
Assets:
      
Finance receivables, net:      
Unearned subsidy income$(1,091) $(1,030)$(738) $(1,091)
Investment in operating leases, net:      
Unearned subsidy income(1,559) (1,313)(1,372) (1,559)
Due from Parent and affiliated companies162
 139
93
 162
Liabilities:      
Debt:      
Related party debt$749
 $1,085
$533
 $749
Due to Parent and affiliated companies106
 87
72
 106
Accrued interest expense:      
Related party debt3
 3
1
 3
Other liabilities:      
VSC unearned administrative fees387
 396
363
 387
Accrued benefit expenses65
 71
69
 65
Support Agreements
HMC and AHFC are parties to a Keep Well Agreement, effective as of September 9, 2005. This Keep Well Agreement provides that HMC will (1)maintain (directly or indirectly) at least 80% ownership in AHFC’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of AHFC that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause AHFC to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with GAAP, and (3) ensure that AHFC has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to AHFC, or HMC shall procure for AHFC, sufficient funds to enable AHFC to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.

F-25


HMC and HCFI are parties to a Keep Well Agreement effective as of September 26, 2005. This Keep Well Agreement provides that HMC will (1)maintain (directly or indirectly) at least 80% ownership in HCFI’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of HCFI that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause HCFI to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with generally accepted accounting principles in Canada, and (3) ensure that HCFI has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to HCFI, or HMC shall procure for HCFI, sufficient funds to enable HCFI to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.
Debt programs supported by the Keep Well Agreements consist of the Company’s commercial paper programs, Private MTN Program, Public MTN Program, Euro MTN Programme, and HCFI’s private placement debt.debt and loans, if any, under AHFC's syndicated bank credit facilities. In connection with the above agreements, AHFC and HCFI have entered into separate Support Compensation Agreements, where each has agreed to pay HMC a quarterly fee based on the amount of outstanding debt that benefit from the Keep Well Agreements. Support Compensation Agreement fees are recognized in general and administrative expenses.

Incentive Financing Programs
The Company receives subsidy payments from AHM and HCI, which supplement the revenues on financing products offered under incentive programs. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The unearned balance is recognized as reductions to the carrying value of finance receivables and investment in operating leases. Subsidy payments on dealer loans are received as earned. Refer to Notes 1(e) and 1(f) for additional information.
Related Party Debt
HCFI issues short-term notes to HCI to fund HCFI’s general corporate operations. Interest rates are based on prevailing rates of debt with comparable terms. Refer to Note 4 for additional information.
Vehicle Service Contract (VSC) Administration
AHFC performs administrative services for VSCs issued by certain subsidiaries of AHM. AHFC’s performance obligations for the services are satisfied over the term of the underlying contracts and revenue is recognized proportionate to the anticipated amount of services to be performed. Contract terms range between two to eightnine years with the majority of contracts having original terms between sixfour and eight years. The majority of the administrative service revenue is recognized during the latter years of the underlying contracts as this is the period in which the majority of VSC claims are processed. AHFC receives fees for performing the administrative services when the contracts are acquired.
Unearned VSC administration fees represent AHFC’s contract liabilities and are included in other liabilities (Note 12). VSC administration income is recognized in other income, net (Note 13). HCFI receives fees for marketing VSCs issued by HCI. These fees are also recognized in other income.income, net. Refer to Note 1(j) for additional information.
AHFC pays fees to AHM for services provided in support of AHFC’s performance of VSC administrative services. The support fees are recognized as an expense within other income, net (Note 13).
Shared Services
The Company shares certain common expenditures with AHM, HCI, and other related parties including information technology services and facilities. The allocated costs for shared services are included in general and administrative expenses.
Benefit Plans
The Company participates in various employee benefit plans that are sponsored by AHM and HCI. The allocated benefit plan expenses are included in general and administrative expenses. Refer to Note 8 for additional information.

F-26


Income taxes
The Company’s U.S. income taxes are recognized on a modified separate return basis pursuant to an intercompany income tax allocation agreement with AHM. Income tax related items are not included in the tables above. Refer to Notes 1(l) and 7 for additional information.
Other
AHM periodically sponsors programs that allow lessees to terminate their lease contracts prior to the contractual maturity date. AHM compensates the Company for rental payments that were waived under these programs. During the fiscal years ended March 31, 20192020 and 2018,2019, the Company recognized $17$13 million and $19$17 million, respectively, under these programs which were reflected as proceeds on the disposition of the returned lease vehicles.
The majority of the amounts due from the Parent and affiliated companies at March 31, 20192020 and 20182019 related to incentive financing program subsidies. The majority of the amounts due to the Parent and affiliated companies at March 31, 20192020 and 20182019 related to wholesale flooring payable to the Parent. These receivable and payable accounts are non-interest-bearing and short-term in nature and are expected to be settled in the normal course of business.

In April 2017, the Company sold all issued and outstanding common stock of its wholly-owned subsidiary American Honda Service Contract Corporation (AHSCC) to AHM for $36 million which was equal to AHSCC’s total equity as of March 31, 2017. AHSCC was not material to the Company’s operations.

AHFC declared and paid semi-annual cash dividends to its parent, AHM, $292 million and $313 million during the fiscal year ended March 31, 2020, $235 million and $271 million during the fiscal year ended March 31, 2019, and $141 million and $206 million during the fiscal year ended March 31, 2018. No dividends were declared or paid during the fiscal year ended March 31, 2017.
(7)Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The primary impact on the effective tax rate is the reduction of the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018.
The Company adopted Staff Accounting Bulletin No. 118 (SAB 118) which provided guidance on accounting for the tax effects of the Tax Act in the Company's interim quarter ended December 31, 2017 to record re-measurement of deferred taxes and a one-time deemed repatriation transition tax (Transition Tax). As of March 31, 2018, the Company completed the accounting for the effect of re-measurement of deferred taxes at the new 21% tax rate. At March 31, 2018, the Company provisionally accrued a total of $52 million for the Transition Tax. Upon further analysis, the Company completed its accounting for the Transition Tax, and reduced the provisional estimate by $19 million in the quarter ended December 31, 2018, for a final amount of $33 million, inclusive of associated unrecognized tax benefits. The adjustment was attributed primarily to the availability of new information, which led to further analysis on key inputs to the Transition Tax calculation. The measurement period adjustment in the current fiscal year decreased the Company's effective tax rate by approximately 1.2% for the fiscal year ended March 31, 2019. The Company has elected not to record deferred taxes for a Global Intangible Low-Taxed Income (GILTI) related book-tax differences, and will treat taxes due on further U.S. inclusions in taxable income related to GILTI as a current period expense when incurred.
During fiscal year 2020, reflecting additional guidance issued by the IRS related to the Tax Act, the Company re-measured unrecognized tax benefits attributable to positions previously claimed. Other domestic and international effects of the Tax Act to the total tax expense are immaterial as of March 31, 2019.2020.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which provides economic relief in response to the coronavirus pandemic. The CARES Act, among other things, includes provisions to allow certain net operating losses to be carried-back up to five years, to increase interest deduction limitations, and to make technical corrections to tax depreciation methods for qualified improvement property. The CARES Act may affect the corporate income taxes imposed by state governments and may result in future responses by state legislatures, some of which could have retroactive effect. The Company evaluated and properly accounted for the provisions of the CARES Act and there was no material impact on the Company’s March 31, 2020 income tax accounts.
The Company’s consolidated income tax expense/(benefit) was computed on a modified separate return basis pursuant to the intercompany tax allocation agreement with the Parent and consisted of the following:

F-27


Current Deferred TotalCurrent Deferred Total
          
(U.S. dollars in millions)(U.S. dollars in millions)
Year ended March 31, 2020     
Federal$(46) $333
 $287
State and local231
 (166) 65
Foreign30
 42
 72
Total$215
 $209
 $424
Year ended March 31, 2019          
Federal$(216) $432
 $216
$(216) $432
 $216
State and local246
 (107) 139
246
 (107) 139
Foreign24
 49
 73
24
 49
 73
Total$54
 $374
 $428
$54
 $374
 $428
Year ended March 31, 2018          
Federal$45
 $(2,838) $(2,793)$45
 $(2,838) $(2,793)
State and local45
 43
 88
45
 43
 88
Foreign49
 27
 76
49
 27
 76
Total$139
 $(2,768) $(2,629)$139
 $(2,768) $(2,629)
Year ended March 31, 2017     
Federal$(265) $596
 $331
State and local(18) 72
 54
Foreign32
 20
 52
Total$(251) $688
 $437
The allocation of federal tax expense between current and deferred tax expense reflects primarily the impact of 100% federal bonus depreciation offset by the elimination of personal property for like-kind exchange purposesfor personal property due to the Tax Cuts and Jobs Act (Tax Act) for the fiscal years ended March 31, 2020, 2019, and 2018, and 50% federal bonus depreciation due to the Protecting Americans from Tax Hikes Act of 2015 for the fiscal year ended March 31, 2017.2018. In addition, the re-measurement of deferred taxes due to the federal income tax rate reduction was reflected in the deferred tax expense in the fiscal year ended March 31, 2018.

Income tax expense differs from the expected income taxes by applying the statutory federal corporate rates of 21.00%, 31.55% and 35.00% for fiscal years ended March 31, 2020 and 2019, 2018 and 2017, respectively,31.55% for fiscal year 2018, to income before income taxes as follows:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Computed “expected” income taxes$351
 $467
 $416
$301
 $351
 $467
Foreign tax rate differential15
 (14) (17)14
 15
 (14)
Effect of foreign dividends and foreign tax credit3
 (10) 4

 3
 (10)
State and local income taxes, net of federal income tax benefit68
 49
 40
62
 68
 49
Change in valuation allowance2
 
 (5)(2) 2
 
Change in estimated state tax rate, net of federal income tax benefit39
 8
 2
(16) 39
 8
Change in unrecognized tax benefit48
 (1) 
64
 48
 (1)
Income tax credits(52) (3) 
(6) (52) (3)
Effect of Tax Act(49) (3,127) 

 (49) (3,127)
Other3
 2
 (3)7
 3
 2
Income tax expense/(benefit)$428
 $(2,629) $437
$424
 $428
 $(2,629)
The effect of the Tax Act includes benefits of $11 million and $3,179 million related to re-measurement of deferred tax assets and liabilities, for the fiscal year ended March 31, 2019 and 2018, respectively, and a benefit of $38 million and an expense of $52 million related to the Transition Tax for fiscal yearyears ended March 31, 2019 and 2018, respectively. The income tax credits of $52 million isare primarily from the Qualified Plug-in ElectronicElectric Drive Motor Vehicle Credit on the Company's lease vehicles. The Company recognizes the benefit of these credits in the period the credits arise. Any unused credits arising in the current year that are available to offset taxable income in future years are recognized in the deferred tax assets.

F-28


The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
March 31,March 31,
2019 20182020 2019
      
(U.S. dollars in millions)(U.S. dollars in millions)
Deferred tax assets:      
State income tax$197
 $192
$177
 $197
Receivable valuation104
 97
Receivable valuation allowance135
 104
Accrued postretirement16
 14
16
 16
State loss carryforwards47
 47
48
 47
Income tax credits64
 
76
 64
Derivatives3
 
19
 3
Other assets43
 38
65
 43
Total gross deferred tax assets474
 388
536
 474
Less valuation allowance(2) 

 (2)
Net deferred tax assets472
 388
536
 472
Deferred tax liabilities:      
HCFI leases349
 319
369
 349
AHFC leases6,456
 6,035
6,679
 6,456
Derivatives
 17
Securitizations18
 10
10
 18
Other48
 42
67
 48
Total gross deferred tax liabilities6,871
 6,423
7,125
 6,871
Net deferred tax liabilities$6,399
 $6,035
$6,589
 $6,399
The increase in the net deferred tax liability is primarily attributable to accelerated depreciation benefits derived from the Tax Act.
The effect of translating HCFI’s net deferred tax liabilities to U.S. dollars upon consolidation resulted in a decrease of $19 million, a decrease of $10 million, and an increase of $8 million, and a decrease of $5 million during the fiscal years ended March 31, 2020, 2019, 2018, and 2017,2018, respectively. The translation adjustments have been recognized as a component of other comprehensive income.
Exception to Recognition of Deferred Tax Liabilities
The Company does not provide for income taxes on its share of the undistributed earnings of HCFI, which are intended to be indefinitely reinvested outside the United States. At March 31, 2019, $9352020, $843 million of accumulated undistributed earnings of HCFI were intended to be so reinvested. If the undistributed earnings as of March 31, 20192020 were to be distributed, the tax liability associated with these indefinitely reinvested earnings would be $58 million.$27 million, inclusive of currency translation adjustments.
Tax Attributes
Included in the Company’s deferred tax assets are net operating loss (NOL) carryforwards with tax benefits resulting from operating losses incurred in various states in which the Company files tax returns in the amounts of $47 million, $47 million and $60$48 million at March 31, 2020, and $47 million at both March 31, 2019 2018 and 2017, respectively.2018. The expiration, if applicable, of these NOL carryforwards varies based on the statutes of each of the applicable states through March 31, 2039.2040. The deferred tax asset related to a federal income tax credit in the amount of $64$76 million at March 31, 20192020 will expire in the fiscal year endedyears ending March 31, 2039.2038 through 2040, if unused.

F-29


Valuation Allowance
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences and carryforward deferred tax assets become deductible or utilized. The Company considers sources of income, including the reversal of deferred tax liabilities, projected future taxable income, and tax planning considerations in making this assessment. Based upon these factors, during the fiscal year ended March 31, 2019, the Company established a valuation allowance of $2 million for certain state NOL carryforwards. The Company believes that it is more likely than not that the remaining deferred tax assets of $472$536 million recognized as of March 31, 20192020 will be realized.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
Balance, beginning of year$22
 $21
 $16
$86
 $22
 $21
Additions for current year tax positions
 
 

 
 
Additions for prior year tax positions64
 1
 5
98
 64
 1
Reductions for prior year tax positions
 
 
(15) 
 
Settlements
 
 

 
 
Reductions related to a lapse in the statute of limitations
 
 

 
 
Foreign currency translation
 
 

 
 
Balance, end of year$86
 $22
 $21
$169
 $86
 $22
Included in the balance of unrecognized tax benefits at March 31, 2020, 2019 and 2018 and 2017 are $84$166 million, $21$84 million and $21 million, net of the federal benefit of state taxes, respectively, the recognition of which would affect the Company’s effective tax rate in future periods. Although it is reasonably possible that the total amounts of unrecognized tax benefits could change within the next twelve months, the Company does not believe such change would be significant. As a result of the above unrecognized tax benefits and various favorable uncertain positions, the Company has recorded a net liability for uncertain tax positions, inclusive of interest and penalties of $89$195 million and $10$89 million as of March 31, 20192020 and 2018,2019, respectively (Note 12).
The Company recognizes income tax-related interest income, interest expense and penalties as a component of income tax expense. DuringThe Company recognized interest expense of $25 million and $9 million, during the fiscal years ended March 31, 2020 and 2019, and 2018, the Company recognized interest expense of $9 million,respectively, and interest income in an amount less than $1 million respectively,during the fiscal year ended March 31, 2018, as a component of income tax expense. There were no settlements during the fiscal year ended March 31, 20192020 and 2018.2019. As of March 31, 2020, 2019 2018 and 2017,2018, the Company’s consolidated balance sheets reflect accrued interest payable of $36 million, $11 million $2 million and $3$2 million, respectively.
As of March 31, 2019,2020, the Company is subject to examination byin various U.S. federal and state tax jurisdictions for returns filed for the taxable years ended March 31, 2008 through 2018, with the exception of one state which is subject to departmental review for returns filed for the taxable years ended March 31, 2001 through 2007.2019. The Company’s Canadian subsidiary, HCFI, is subject to examination for returns filed for the taxable years ended March 31, 20122013 through 20182019 federally, and returns filed for the taxable years ended March 31, 2009 through 20182019, except for 2011, provincially. The Company believes appropriate provision has been made for all outstanding issues for all open years.

F-30


(8)Benefit Plans
The Company participates in certain retirement and other postretirement benefit plans sponsored by AHM and HCI (collectively referred to as the Sponsors).
The Company participates in defined benefit retirement plans (the Pension Plans) maintained by the Sponsors. The names of the Pension Plans maintained by AHM are the Honda Retirement Plan and the Honda Pension Equalization Plan. The name of the Pension Plan maintained by HCI is the Pension Plan for Associates of Honda Canada Inc. Employees who commenced service after September 3, 2013 are not eligible to participate in the Pension Plans maintained by AHM. Under the amendments to the Pension Plan maintained by HCI, employees who commenced service after January 1, 2014 are not eligible to participate in their Pension Plan. The Company pays for its share of the Pension Plan costs allocated by the Sponsors. The Pension Plans’ expense, included in general and administrative expenses, was $7$6 million for the fiscal year ended March 31, 2019, and2020, $67 million for both the fiscal yearsyear ended March 31, 20182019 and 2017.$6 million for the fiscal year ended March 31, 2018.
The Company participates in defined contribution savings plans (the Savings Plans) maintained by the Sponsors. TheseParticipants in these plans allow participants to make contributions subject to Internal Revenue Service or Canada Revenue Agency limits. General and administrative expenses includes the Company's portion of contributions to the Savings Plans of $8 million for both the fiscal years ended March 31, 2020, 2019 and 2018, and $7 million for fiscal year ended March 31, 2017.2018.
The Company participates in other postretirement plans maintained by the Sponsors primarily to provide certain healthcare benefits for retired employees. Substantially all employees become eligible for these benefits if they have met certain age and service requirements at retirement. The Company’s expense for the postretirement plans, included in general and administrative expenses, was $4 million for the fiscal year ended March 31, 2019, and $5 million for both the fiscal years ended March 31, 20182020, and 2019 and 2017.$5 million for the fiscal year ended March 31, 2018.
(9)Commitments and Contingencies
Operating Leases
The Company leases certain premises and equipment on a long-term basis under noncancelablethrough operating leases. SomeAHFC leases its premises and equipment from third parties and HCFI leases its premises from HCI. Many of thesethe Company's leases requirecontain renewal options, and generally have no residual value guarantees or material covenants. When it is reasonably certain that the Company will exercise the option to pay property taxes, insurance, andrenew a lease, the Company will include the renewal option in the evaluation of the lease term. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with a lease term of less than one year. As most of the Company's leases do not provide an implicit rate, the incremental borrowing rate is used in determining the present value of lease payments. The right-of-use assets in operating lease arrangements are reported in other expenses. Lease expense was $10 million, $9 million and $10 million forassets on the fiscal years endedCompany's consolidated balance sheets.
Operating lease liabilities are reported in other liabilities on the Company's consolidated balance sheets. At March 31, 2019, 2018 and 2017, respectively. Annual minimum2020, maturities of operating lease commitments attributable to long-term noncancelable operating leases at March 31, 2019liabilities were as follows (U.S. dollars in millions):
Year ending March 31: (U.S. dollars in millions)
2020$10
202110
$10
20229
9
20239
9
20248
8
20257
Thereafter24
18
Total$70
Total undiscounted future lease obligations61
Less: imputed interest(6)
Operating lease liabilities$55



F-31


Rent expense under operating leases was $10 million for the fiscal years ended March 31, 2020 and March 31, 2019 and $9 million for fiscal year ended March 31, 2018. Rent expense is included within general and administrative expenses.
As of March 31, 2020, the weighted average remaining lease term for operating leases was 7 years and the weighted average remaining discount rate for operating leases was 3.05%.
Revolving Lines of Credit to Dealerships
The Company extends commercial revolving lines of credit to dealerships to support their business activities including facilities refurbishment and general working capital requirements. The amounts borrowed are generally secured by the assets of the borrowing entity. The majority of the lines have annual renewal periods. The unused balance of commercial revolving lines of credit was $232$358 million as of March 31, 2019.2020. The Company also has commitments to finance the construction of auto dealership facilities. The remaining unfunded balance for these construction loans was $22$6 million as of March 31, 2019.2020.
Legal Proceedings and Regulatory Matters
The Company establishes accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When able, the Company will determine estimates of reasonably possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established.

The Company is involved, in the ordinary course of business, in various legal proceedings including claims of individual customers and purported class action lawsuits. Certain of these actions are similar to suits filed against other financial institutions and captive finance companies. Most of these proceedings concern customer allegations of wrongful repossession or defamation of credit. The Company is also subject to governmental reviews and inquiries from time to time. The Company has received two Civil Investigative Demands from the U.S. Department of Justice (DOJ) relating to financing of motor vehicles by servicemembers under the Servicemembers Civil Relief Act. The Company is cooperating with the DOJ and is responding to their information requests. Based on available information and established accruals, management does not believe it is reasonably possible that the results of these proceedings, in the aggregate, will have a material adverse effect on the Company’s consolidated financial statements.
(10)Securitizations and Variable Interest Entities (VIE)
The trusts utilizedCompany utilizes SPEs for on-balance sheetits asset-backed securitizations and these SPEs are considered VIEs, which are required to be consolidated by their primary beneficiary. The Company is considered to be the primary beneficiary of these trustsSPEs due to (i) the power to direct the activities of the trustsSPEs that most significantly impact the trusts’SPEs’ economic performance through itsthe Company's role as servicer, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the trustsSPEs through the subordinated certificates and residual interest retained. The debt securities issued by the trustsSPEs to third-party investors along with the assets of the trustsSPEs are included in the Company’s consolidated financial statements.
During the fiscal years ended March 31, 20192020 and 2018,2019, the Company issued notes through asset-backed securitizations, which were accounted for as secured financing transactions totaling $4.8$6.2 billion and $5.2$4.8 billion, respectively. The notes were secured by receivablesassets with an initial principal balance of $5.7$6.8 billion and $5.8$5.7 billion, for the fiscal years ended March 31, 2020 and 2019, and 2018, respectively.

F-32


The table below presents the carrying amounts of assets and liabilities of consolidated securitization trustsSPEs as they are reported in the Company’s consolidated balance sheets. All amounts exclude intercompany balances, which have been eliminated upon consolidation. The assets of the trusts can only be used to settle the obligations of the trusts and investorsInvestors in the notes issued by a trustSPE only have recourse to the assets of such trustSPE and do not have recourse to the assets of AHFC, HCFI, or ourits other subsidiaries or to other trusts.

SPEs. The assets of SPEs are the only source of funds for repayment on the notes.
 March 31,
 2019 2018
    
 (U.S. dollars in millions)
Assets:   
Finance receivables$9,352
 $9,112
Unamortized costs and subsidy income, net(265) (203)
Allowance for credit losses(14) (14)
Finance receivables, net9,073
 8,895
Vehicles held for disposition3
 4
Restricted cash (1)
588
 443
Accrued interest receivable (1)
9
 9
Total assets$9,673
 $9,351
Liabilities:   
Secured debt$8,803
 $8,745
Unamortized discounts and fees(13) (12)
Secured debt, net8,790
 8,733
Accrued interest expense8
 6
Total liabilities$8,798
 $8,739
  March 31, 2020
  Assets Liabilities
           
  (U.S. dollars in millions)
  Securitized assets 
Restricted cash (1)
 Other Secured debt Other
Retail loan securitizations $9,645
 $581
 $16
 $9,345
 $7
Operating lease securitizations 493
 1
 
 403
 2
Total $10,138
 $582
 $16
 $9,748
 $9
           
  March 31, 2019
  Assets Liabilities
           
  (U.S. dollars in millions)
  Securitized assets 
Restricted cash (1)
 Other Secured debt Other
Retail loan securitizations $9,073
 $588
 $12
 $8,790
 $8
Operating lease securitizations 
 
 
 
 
Total $9,073
 $588
 $12
 $8,790
 $8
________________________
(1)Included with other assets in the Company’s consolidated balance sheets (Note 11).

In their role as servicers, AHFC and HCFI collect principal and interest payments on the underlying receivablessecuritized assets on behalf of the securitization trusts.SPEs. Cash collected during a calendar month is required to be remitted to the trustsSPEs in the following month. AHFC and HCFI are not restricted from using the cash collected for their general purposes prior to the remittance to the trusts.SPEs. As of March 31, 20192020 and 2018,2019, AHFC and HCFI had combined cash collections of $496$468 million and $466$496 million, respectively, which were required to be remitted to the trusts.SPEs.

F-33


(11)Other Assets
Other assets consisted of the following:
March 31,March 31,
2019 20182020 2019
      
(U.S. dollars in millions)(U.S. dollars in millions)
Interest receivable and other assets$106
 $84
$107
 $106
Vehicles held for disposition228
 252
Other receivables175
 144
172
 175
Deferred expense115
 122
105
 115
Software, net of accumulated amortization of $154 and $146
as of March 31, 2019 and 2018, respectively
29
 33
Property and equipment, net of accumulated depreciation of $ 21and $20
as of March 31, 2019 and 2018, respectively
6
 6
Software, net of accumulated amortization of $156 and $154
as of March 31, 2020 and 2019, respectively
23
 29
Property and equipment, net of accumulated depreciation of $23 and $21
as of March 31, 2020 and 2019, respectively
4
 6
Restricted cash588
 443
582
 588
Operating lease assets48
 
Like-kind exchange assets73
 75
91
 73
Other miscellaneous assets25
 27
18
 25
Total$1,117
 $934
$1,378
 $1,369
Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets, which range from three to five years. General and administrative expenses include depreciation and amortization expense of $11 million $10 million and $7 million for both the fiscal years ended March 31, 2020 and 2019, 2018 and 2017, respectively.$10 million for the fiscal year ended March 31, 2018.
(12)Other Liabilities
Other liabilities consisted of the following:
March 31,March 31,
2019 20182020 2019
      
(U.S. dollars in millions)(U.S. dollars in millions)
Dealer payables$241
 $174
$68
 $241
Accrued interest expense138
 150
Accounts payable and accrued expenses399
 363
408
 399
Lease security deposits85
 78
84
 85
VSC unearned administrative fees (Note 6)387
 396
363
 387
Unearned income, operating leases352
 347
358
 352
Operating lease liabilities55
 
Uncertain tax positions89
 10
195
 89
Other liabilities14
 14
20
 14
Total$1,567
 $1,382
$1,689
 $1,717


F-34


(13)Other Income, net
Other income consisted of the following:
Years ended March 31,Years ended March 31,
2019 2018 20172020 2019 2018
          
(U.S. dollars in millions)(U.S. dollars in millions)
VSC administration (Note 6)$109
 $107
 $103
$109
 $109
 $107
Other, net(38) (51) 2
(21) (38) (51)
Total$71
 $56
 $105
$88
 $71
 $56
(14)Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Nonperformance risk is also required to be reflected in the fair value measurement, including an entity’s own credit standing when measuring the fair value of a liability.
Recurring Fair Value Measurements
The following tables summarize the fair value hierarchy of assets and liabilities measured at fair value on a recurring basis:
March 31, 2019March 31, 2020
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
              
(U.S. dollars in millions)(U.S. dollars in millions)
Assets:              
Derivative instruments:              
Interest rate swaps$
 $308
 $
 $308
$
 $704
 $
 $704
Cross currency swaps
 72
 
 72

 44
 
 44
Total assets$
 $380
 $
 $380
$
 $748
 $
 $748
Liabilities:              
Derivative instruments:              
Interest rate swaps$
 $307
 $
 $307
$
 $830
 $
 $830
Cross currency swaps
 261
 
 261

 142
 
 142
Total liabilities$
 $568
 $
 $568
$
 $972
 $
 $972

F-35


March 31, 2018March 31, 2019
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
              
(U.S. dollars in millions)(U.S. dollars in millions)
Assets:              
Derivative instruments:              
Interest rate swaps$
 $465
 $
 $465
$
 $308
 $
 $308
Cross currency swaps
 285
 
 285

 72
 
 72
Total assets$
 $750
 $
 $750
$
 $380
 $
 $380
Liabilities:              
Derivative instruments:              
Interest rate swaps$
 $342
 $
 342
$
 $307
 $
 307
Cross currency swaps
 72
 
 72

 261
 
 261
Total liabilities$
 $414
 $
 $414
$
 $568
 $
 $568
The valuation techniques used in measuring assets and liabilities at fair value on a recurring basis are described below:
Derivative Instruments
The Company’s derivatives are transacted in over-the-counter markets and quoted market prices are not readily available. The Company uses third-party developed valuation models to value derivative instruments. These models estimate fair values using discounted cash flow modeling techniques, which utilize the contractual terms of the derivative instruments and market-based inputs, including interest rates and foreign exchange rates. Discount rates incorporate counterparty and HMC specific credit default spreads to reflect nonperformance risk.
The Company’s derivative instruments are classified as Level 2 since all significant inputs are observable and do not require management judgment. There were no transfers between fair value hierarchy levels during the fiscal years ended March 31, 20192020 and 2018.2019. Refer to notes 1(n) and 5 for additional information on derivative instruments.
Nonrecurring Fair Value Measurements
The following tables summarize nonrecurring fair value measurements recognized for assets still held at the end of the reporting periods presented:
Level 1 Level 2 Level 3 Total 
Lower-of-cost
or fair value
adjustment
Level 1 Level 2 Level 3 Total 
Lower-of-cost
or fair value
adjustment
                  
(U.S. dollars in millions)(U.S. dollars in millions)
March 31, 2020         
Vehicles held for disposition$
 $
 $145
 $145
 $31
March 31, 2019                  
Vehicles held for disposition$
 $
 $171
 $171
 $33
$
 $
 $171
 $171
 $33
March 31, 2018         
Vehicles held for disposition$
 $
 $170
 $170
 $31
The following describes the methodologies and assumptions used in nonrecurring fair value measurements, which relate to the application of lower of cost or fair value accounting on long-lived assets.
Vehicles Held for Disposition
Vehicles held for disposition consist of returned and repossessed vehicles. They are valued at the lower of their carrying value or estimated fair value, less estimated disposition costs. The fair value is based on current average selling prices of like vehicles at wholesale used vehicle auctions.

F-36


Fair Value of Financial Instruments
The following tables summarize the carrying values and fair values of the Company’s financial instruments except for those measured at fair value on a recurring basis. Certain financial instruments and all nonfinancial assets and liabilities are excluded from fair value disclosure requirements including the Company’s direct financing lease receivables and investment in operating leases.
March 31, 2019March 31, 2020
  Fair value  Fair value
Carrying
value
 Level 1 Level 2 Level 3 Total
Carrying
value
 Level 1 Level 2 Level 3 Total
                  
(U.S. dollars in millions)(U.S. dollars in millions)
Assets:                  
Cash and cash equivalents$795
 $795
 $
 $
 $795
$1,503
 $1,503
 $
 $
 $1,503
Dealer loans, net5,827
 
 
 5,611
 5,611
5,600
 
 
 5,136
 5,136
Retail loans, net34,569
 
 
 34,857
 34,857
33,954
 
 
 34,441
 34,441
Restricted cash588
 588
 
 
 588
582
 582
 
 
 582
                  
Liabilities:                  
Commercial paper$5,755
 $
 $5,755
 $
 $5,755
$5,490
 $
 $5,488
 $
 $5,488
Related party debt749
 
 749
 
 749
533
 
 533
 
 533
Bank loans4,962
 
 5,000
 
 5,000
4,938
 
 4,780
 
 4,780
Medium term note programs25,984
 
 26,130
 
 26,130
26,157
 
 25,740
 
 25,740
Other debt3,514
 
 3,535
 
 3,535
3,266
 
 3,232
 
 3,232
Secured debt8,790
 
 8,799
 
 8,799
9,748
 
 9,794
 
 9,794
March 31, 2018March 31, 2019
  Fair value  Fair value
Carrying
value
 Level 1 Level 2 Level 3 Total
Carrying
value
 Level 1 Level 2 Level 3 Total
                  
(U.S. dollars in millions)(U.S. dollars in millions)
Assets:                  
Cash and cash equivalents$783
 $783
 $
 $
 $783
$795
 $795
 $
 $
 $795
Dealer loans, net5,495
 
 
 5,299
 5,299
5,827
 
 
 5,611
 5,611
Retail loans, net32,320
 
 
 32,295
 32,295
34,569
 
 
 34,857
 34,857
Restricted cash443
 443
 
 
 443
588
 588
 
 
 588
                  
Liabilities:                  
Commercial paper$5,167
 $
 $5,167
 $
 $5,167
$5,755
 $
 $5,755
 $
 $5,755
Related party debt1,085
 
 1,085
 
 1,085
749
 
 749
 
 749
Bank loans5,419
 
 5,480
 
 5,480
4,962
 
 5,000
 
 5,000
Medium term note programs24,207
 
 24,176
 
 24,176
25,984
 
 26,130
 
 26,130
Other debt3,250
 
 3,229
 
 3,229
3,514
 
 3,535
 
 3,535
Secured debt8,733
 
 8,683
 
 8,683
8,790
 
 8,799
 
 8,799
Fair value information presented in the tables above is based on information available at March 31, 20192020 and 2018.2019. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates, and therefore, the current estimates of fair value at dates subsequent to those dates may differ significantly from the amounts presented herein.

F-37


(15)Segment Information
The Company’s reportable segments are based on the two geographic regions where operating results are measured and evaluated by management: the United States and Canada.
Segment performance is evaluated using an internal measurement basis, which differs from the Company’s consolidated results prepared in accordance with GAAP. Segment performance is evaluated on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. Since the Company does not elect to apply hedge accounting, the impact to earnings resulting from these valuation adjustments as reported under GAAP is not representative of segment performance as evaluated by management. Realized gains and losses on derivative instruments, net of realized gains and losses on foreign currency denominated debt, are included in the measure of net revenues when evaluating segment performance.
No adjustments are made to segment performance to allocate any revenues or expenses. Financing products offered throughout the United States and Canada are substantially similar. Segment revenues from the various financing products are reported on the same basis as GAAP consolidated results.
Financial information for the Company’s reportable segments for the fiscal years ended or at March 31 is summarized in the following tables:
United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
              
(U.S. dollars in millions)(U.S. dollars in millions)
Year ended March 31, 2019       
Year ended March 31, 2020       
Revenues:              
Direct financing leases$
 $4
 $
 $4
Retail1,406
 204
 
 1,610
$1,533
 $204
 $
 $1,737
Dealer211
 21
 
 232
198
 24
 
 222
Operating leases6,001
 1,252
 
 7,253
6,402
 1,347
 
 7,749
Total revenues7,618
 1,481
 
 9,099
8,133
 1,575
 
 9,708
Depreciation on operating leases4,520
 1,000
 
 5,520
Leased vehicle expenses4,667
 1,026
 
 5,693
Interest expense1,015
 175
 
 1,190
1,063
 178
 
 1,241
Realized (gains)/losses on derivatives and foreign currency denominated debt15
 (17) 2
 
106
 (4) (102) 
Net revenues2,068
 323
 (2) 2,389
2,297
 375
 102
 2,774
Gain/(Loss) on disposition of lease vehicles100
 31
 
 131
Other income63
 8
 
 71
77
 11
 
 88
Total net revenues2,231
 362
 (2) 2,591
2,374
 386
 102
 2,862
Expenses:              
General and administrative expenses403
 53
 
 456
439
 59
 
 498
Provision for credit losses242
 7
 
 249
393
 9
 
 402
Impairment loss on operating lease14
 
 
 14

 
 
 
Early termination loss on operating leases98
 3
 
 101
327
 4
 
 331
Loss on lease residual values
 
 
 
(Gain)/Loss on derivative instruments
 
 509
 509

 
 305
 305
(Gain)/Loss on foreign currency revaluation of debt
 
 (407) (407)
 
 (107) (107)
Income before income taxes$1,474
 $299
 $(104) $1,669
$1,215
 $314
 $(96) $1,433
March 31, 2019       
March 31, 2020       
Finance receivables, net$36,028
 $4,396
 $
 $40,424
$35,381
 $4,173
 $
 $39,554
Investment in operating leases, net27,493
 5,113
 
 32,606
28,809
 5,034
 
 33,843
Total assets66,264
 9,700
 
 75,964
67,566
 9,690
 
 77,256

F-38


United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
              
(U.S. dollars in millions)(U.S. dollars in millions)
Year ended March 31, 2018       
Year ended March 31, 2019       
Revenues:              
Direct financing leases$
 $13
 $
 $13
Retail1,181
 188
 
 1,369
$1,406
 $208
 $
 $1,614
Dealer158
 17
 
 175
211
 21
 
 232
Operating leases5,815
 1,075
 
 6,890
6,001
 1,252
 
 7,253
Total revenues7,154
 1,293
 
 8,447
7,618
 1,481
 
 9,099
Depreciation on operating leases4,598
 883
 
 5,481
Leased vehicle expenses4,420
 969
 
 5,389
Interest expense770
 127
 
 897
1,015
 175
 
 1,190
Realized (gains)/losses on derivatives and foreign currency denominated debt(13) (1) 14
 
15
 (17) 2
 
Net revenues1,799
 284
 (14) 2,069
2,168
 354
 (2) 2,520
Gain/(Loss) on disposition of lease vehicles66
 27
 
 93
Other income50
 6
 
 56
63
 8
 
 71
Total net revenues1,915
 317
 (14) 2,218
2,231
 362
 (2) 2,591
Expenses:              
General and administrative expenses384
 55
 
 439
403
 53
 
 456
Provision for credit losses239
 5
 
 244
242
 7
 
 249
Impairment loss on operating leases14
 
 
 14
Early termination loss on operating leases105
 3
 
 108
98
 3
 
 101
Loss on lease residual values
 3
 
 3
(Gain)/Loss on derivative instruments
 
 (550) (550)
 
 509
 509
(Gain)/Loss on foreign currency revaluation of debt
 
 494
 494

 
 (407) (407)
Income before income taxes$1,187
 $251
 $42
 $1,480
$1,474
 $299
 $(104) $1,669
March 31, 2018       
March 31, 2019       
Finance receivables, net$33,311
 $4,645
 $
 $37,956
$36,028
 $4,396
 $
 $40,424
Investment in operating leases, net27,040
 4,777
 
 31,817
27,493
 5,113
 
 32,606
Total assets62,976
 9,650
 
 72,626
66,264
 9,700
 
 75,964

F-39


United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
United
States
 Canada 
Valuation
adjustments and
reclassifications
 
Consolidated
Total
              
(U.S. dollars in millions)(U.S. dollars in millions)
Year ended March 31, 2017       
Year ended March 31, 2018       
Revenues:              
Direct financing leases$
 $34
 $
 $34
Retail1,030
 158
 
 1,188
$1,181
 $201
 $
 $1,382
Dealer133
 14
 
 147
158
 17
 
 175
Operating leases5,547
 786
 
 6,333
5,815
 1,075
 
 6,890
Total revenues6,710
 992
 
 7,702
7,154
 1,293
 
 8,447
Depreciation on operating leases4,403
 653
 
 5,056
Leased vehicle expenses4,532
 859
 
 5,391
Interest expense638
 90
 
 728
770
 127
 
 897
Realized (gains)/losses on derivatives and foreign currency denominated debt(35) 17
 18
 
(13) (1) 14
 
Net revenues1,704
 232
 (18) 1,918
1,865
 308
 (14) 2,159
Gain/(Loss) on disposition of lease vehicles24
 19
 
 43
Other income100
 5
 
 105
50
 6
 
 56
Total net revenues1,828
 256
 (18) 2,066
1,915
 314
 (14) 2,215
Expenses:              
General and administrative expenses383
 51
 
 434
384
 55
 
 439
Provision for credit losses199
 11
 
 210
239
 5
 
 244
Early termination loss on operating leases67
 6
 
 73
105
 3
 
 108
Loss on lease residual values
 15
 
 15
(Gain)/Loss on derivative instruments
 
 315
 315

 
 (550) (550)
(Gain)/Loss on foreign currency revaluation of debt
 
 (171) (171)
 
 494
 494
Income before income taxes$1,179
 $173
 $(162) $1,190
$1,187
 $251
 $42
 $1,480
March 31, 2017       
March 31, 2018       
Finance receivables, net$31,447
 $4,457
 $
 $35,904
$33,311
 $4,645
 $
 $37,956
Investment in operating leases, net27,380
 3,930
 
 31,310
27,040
 4,777
 
 31,817
Total assets61,328
 8,526
 
 69,854
62,976
 9,650
 
 72,626

F-40


(16)Selected Quarterly Financial Data (Unaudited)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 Full Year
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 Full Year
                  
(U.S. dollars in millions)(U.S. dollars in millions)
Year ended March 31, 2020         
Total revenues$2,393
 $2,435
 $2,442
 $2,438
 $9,708
Leased vehicle expenses1,392
 1,409
 1,463
 1,429
 5,693
Interest expense322
 318
 307
 294
 1,241
Other income20
 23
 24
 21
 88
Total net revenues699
 731
 696
 736
 2,862
Provision for credit losses (1)
48
 58
 65
 231
 402
Early termination loss on operating leases (1)
24
 36
 37
 234
 331
Net income299
 388
 295
 27
 1,009
Net income attributable to
American Honda Finance Corporation
272
 355
 268
 17
 912
Year ended March 31, 2019                  
Total revenues$2,200
 $2,252
 $2,300
 $2,347
 $9,099
$2,200
 $2,252
 $2,300
 $2,347
 $9,099
Depreciation on operating leases1,375
 1,361
 1,376
 1,408
 5,520
Leased vehicle expenses1,328
 1,314
 1,352
 1,395
 5,389
Interest expense274
 293
 303
 320
 1,190
274
 293
 303
 320
 1,190
Gain on disposition of lease vehicles47
 47
 24
 13
 131
Other income15
 17
 19
 20
 71
15
 17
 19
 20
 71
Total net revenues613
 662
 664
 652
 2,591
613
 662
 664
 652
 2,591
Provision for credit losses44
 62
 75
 68
 249
44
 62
 75
 68
 249
Early termination loss on operating leases17
 39
 22
 23
 101
17
 39
 22
 23
 101
Net income310
 285
 348
 298
 1,241
310
 285
 348
 298
 1,241
Net income attributable to
American Honda Finance Corporation
284
 259
 326
 276
 1,145
284
 259
 326
 276
 1,145
Year ended March 31, 2018         
Total revenues$2,041
 $2,111
 $2,140
 $2,155
 $8,447
Depreciation on operating leases1,346
 1,363
 1,378
 1,394
 5,481
Interest expense204
 218
 229
 246
 897
Gain on disposition of lease vehicles29
 34
 8
 22
 93
Other income14
 13
 14
 15
 56
Total net revenues534
 577
 555
 552
 2,218
Provision for credit losses39
 83
 65
 57
 244
Early termination loss on operating leases17
 42
 22
 27
 108
Net income248
 222
 3,370
 269
 4,109
Net income attributable to
American Honda Finance Corporation
221
 192
 3,349
 247
 4,009

________________________
(1)During the fourth quarter of fiscal year ended March 31, 2020, the increase in provision for credit losses and early termination losses on operating leases as a result of the COVID-19 pandemic has resulted in a lower net income.


F-41