American Honda Finance Corp.

06/18/2025 | Press release | Distributed by Public on 06/18/2025 13:07

Annual Report for Fiscal Year Ending March 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our primary focus, in collaboration with AHM and HCI, is to provide support for the sale of Honda and Acura products and maintain customer and dealer satisfaction and loyalty. To deliver this support effectively, we seek to maintain competitive cost of funds, efficient operations, and effective risk and compliance management. The primary factors influencing our results of operations, cash flows, and financial condition include the volume of Honda and Acura sales and the portion of those sales that we finance, our cost of funds, competition from other financial institutions, consumer credit defaults, and used motor vehicle prices.
A substantial portion of our consumer financing business is acquired through incentive financing programs sponsored by AHM and HCI. The volume of these incentive financing programs and the allocation of those programs between retail loans and leases may vary from fiscal period to fiscal period depending upon the respective marketing strategies of AHM and HCI. AHM and HCI's marketing strategies are based in part on their business planning and control, in which we do not participate. Therefore, we cannot predict the level of incentive financing programs AHM and HCI may sponsor in the future. Our consumer financing acquisition volumes are substantially dependent on the extent to which incentive financing programs are offered. Increases in incentive financing programs generally increase our financing penetration rates, which typically results in increased financing acquisition volumes for us. The amount of subsidy payments we receive from AHM and HCI is dependent on the terms of the incentive financing programs and the interest rate environment. Subsidy payments are received upon acquisition and recognized in revenue throughout the life of the loan or lease; therefore, a significant change in the level of incentive financing programs in a fiscal period typically only has a limited impact on our results of operations for that period. The amount of subsidy income we recognize in a fiscal period is dependent on the cumulative level of subsidized contracts outstanding that were acquired through incentive financing programs.
We seek to maintain high quality consumer and dealer account portfolios, which we support with strong underwriting standards, risk-based pricing, and effective collection practices. Our cost of funds is facilitated by the diversity of our funding sources, and effective interest rate and foreign currency exchange risk management. We manage expenses to support our profitability, including adjusting staffing needs based upon our business volumes and centralizing certain functions. Additionally, we use risk and compliance management practices to optimize credit and residual value risk levels and maintain compliance with our pricing, underwriting and servicing policies at the United States, Canadian, state and provincial levels.
References in this report to our "fiscal year 2025", "fiscal year 2024" and "fiscal year 2023" refer to our fiscal years ended March 31, 2025, 2024 and 2023, respectively.
Recent Developments
HMC Notice of Execution of Memorandum of Understanding
On December 23, 2024, HMC filed a Report on Form 6-K with the SEC disclosing a Notice of Execution of Memorandum of Understanding regarding, among other things, the Consideration of a Business Integration through the Establishment of a Joint Holding Company between HMC and Nissan Motor Co., Ltd. (Nissan). HMC further disclosed Nissan, HMC, and Mitsubishi Motors Corporation (Mitsubishi Motors) signed a memorandum of understanding to explore the possibility of Mitsubishi Motors' participation, involvement, and synergy sharing in relation to the memorandum of understanding between HMC and Nissan.
On February 13, 2025, HMC filed a Report on Form 6-K with the SEC disclosing that HMC and Nissan agreed to terminate the memorandum of understanding signed on December 23, 2024 for consideration of a business integration between the two companies. HMC further disclosed that Nissan, HMC, and Mitsubishi Motors agreed to terminate their memorandum of understanding regarding the consideration of the structure for a tripartite collaboration, in light of the termination of the memorandum of understanding between Nissan and HMC.
Tariffs and Trade Policies
The Trump Administration has enacted or proposed various tariffs impacting the automotive industry including, but not limited to, specific tariffs on imported automobiles and automobile parts, broader tariffs impacting the automotive industry supply chains such as tariffs on raw materials, and various baseline tariffs for countries. There remains significant uncertainty surrounding tariffs and trade policies amid the revisions to and suspension of tariffs by the Trump Administration and the various retaliatory measures taken or threatened by foreign countries. The ultimate impact of tariffs and trade policies will depend on various factors, including the scope, timing, amount and nature, but such tariffs and trade policies would likely have a negative impact on our overall business, including but not limited to the production and availability of new vehicles, higher production costs, dealer inventory levels, new vehicle sales, and ultimately consumer financing acquisition volumes. The broader economic impact of tariffs and trade policies may increase inflation, reduce economic growth, or cause a recession that could, among other things, reduce consumer demand for vehicles and cause financial market to experience increased volatility, reducing liquidity and credit availability.
Results of Operations
We assess the performance of our operations based on the two geographic regions where we operate: the United States and Canada. The measure of profit or loss used to assess the performance of our United States and Canada segments is income before income taxes and the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, see Note 14-Segment and Geographic Information of Notes to Consolidated Financial Statements. The following tables and related discussion are presented based on the measure used to assess the performance of our United States and Canada segments.
Operating Environment Overview
New vehicle production and dealer inventory levels have normalized since the lows we experienced during the first half of fiscal year 2023. Total consumer financing acquisition volumes remained strong with the support of incentive programs and our total outstanding asset balances continued to increase during fiscal year 2025. Although benchmark interest rates have declined since the firstquarter of fiscal year 2025, the returns on our consumer financing assets and effective interest rates on our debt remained higher during fiscal year 2025 relative to fiscal 2024.
The trend in delinquencies and charge-offs continued to increase which may be attributable to the negative effects of higher monthly loan and lease payments caused by higher transaction prices, inflationary pressures, high interest rates, and other factors affecting consumers' ability to perform on their obligations. Used vehicle prices have softened but remain relatively strong with return rates on leased vehicles remaining at low levels.
Segment Results-Comparison of Fiscal Years Ended March 31, 2025 and 2024
Results of operations for the United States segment and the Canada segment are summarized below:
United States Segment Canada Segment Total Segments
Years ended March 31, Difference Years ended March 31, Difference Years ended March 31,
2025 2024 Amount % 2025 2024 Amount % 2025 2024
(U.S. dollars in millions)
Revenues:
Retail $ 2,474 $ 1,855 $ 619 33 % $ 274 $ 221 $ 53 24 % $ 2,748 $ 2,076
Dealer 268 206 62 30 % 23 24 (1) (4) % 291 230
Operating leases 5,634 5,192 442 9 % 816 907 (91) (10) % 6,450 6,099
Total revenues 8,376 7,253 1,123 15 % 1,113 1,152 (39) (3) % 9,489 8,405
Leased vehicle expenses 3,783 3,641 142 4 % 607 699 (92) (13) % 4,390 4,340
Interest expense 2,209 1,464 745 51 % 236 239 (3) (1) % 2,445 1,703
Realized (gains)/losses on derivatives and foreign currency debt 141 (81) 222 n/m (12) (60) 48 (80) % 129 (141)
Net revenues 2,243 2,229 14 1 % 282 274 8 3 % 2,525 2,503
Other income, net 141 110 31 28 % 18 18 - - % 159 128
Total net revenues 2,384 2,339 45 2 % 300 292 8 3 % 2,684 2,631
Expenses:
General and administrative expenses 542 503 39 8 % 55 54 1 2 % 597 557
Provision for credit losses 293 290 3 1 % 13 11 2 18 % 306 301
Early termination loss on operating leases 135 98 37 38 % 1 2 (1) (50) % 136 100
Income before income taxes and valuation adjustments $ 1,414 $ 1,448 $ (34) (2) % $ 231 $ 225 $ 6 3 % $ 1,645 $ 1,673
_______________________
n/m = not meaningful
The following table summarizes average outstanding asset balances, units, and yields and average outstanding debt and interest rates.
United States Segment Canada Segment
Years ended March 31, Difference Years ended March 31, Difference
2025 2024 Amount % 2025 2024 Amount %
(U.S. dollars in millions except as noted, units in thousands) (1)
Retail loans:
Average outstanding balance $ 41,952 $ 35,482 $ 6,470 18 % $ 4,584 $ 4,217 $ 367 9 %
Average outstanding units 2,201 1,994 207 10 % 286 273 13 5 %
Effective yield 5.9 % 5.2 % 6.0 % 5.2 %
Dealer loans:
Average outstanding balance $ 3,894 $ 2,863 $ 1,031 36 % $ 372 $ 340 $ 32 9 %
Effective yield 6.9 % 7.2 % 6.2 % 7.1 %
Operating leases:
Average outstanding balance $ 25,325 $ 23,655 $ 1,670 7 % $ 3,421 $ 3,738 $ (317) (8) %
Average outstanding units 860 896 (36) (4) % 164 189 (25) (13) %
Average monthly rental income(2)
$ 546 $ 483 $ 63 13 % $ 414 $ 400 $ 14 4 %
Average monthly depreciation(2),(3)
$ 374 $ 349 $ 25 7 % $ 314 $ 313 $ 1 - %
Debt:
Average outstanding balance $ 50,399 $ 39,857 $ 10,542 26 % $ 5,600 $ 5,444 $ 156 3 %
Effective interest rate 4.4 % 3.7 % 4.2 % 4.4 %
_______________________
(1)Average outstanding balances and units based on month end amounts during respective periods. Effective yields and interest rates based on average outstanding month end balances.
(2)U.S. dollars per unit. Average monthly revenue and depreciation based on average outstanding month end units.
(3)Excludes gains on disposition of leased vehicles.
United States Segment
Revenues
-Revenue from retail loans increased due to higher average outstanding balances and higher yields.
-Revenue from dealer loans increased due to higher average outstanding balances primarily of wholesale flooring loans as a result of higher dealer inventory levels.
-Operating lease revenue increased due to an increase in average revenue per unit, which was partially offset by lower average outstanding units.
Leased vehicle expenses
Leased vehicle expenses increased due to higher average depreciation expense per unit, which was partially offset by lower average outstanding units.
Interest expense
Interest expense increased due to higher average outstanding debt balances and higher average interest rates. See "-Liquidity and Capital Resources" below for more information.
Realized (gains)/losses on derivatives and foreign currency debt
Net realized losses during fiscal year 2025 consisted of losses on pay float interest rate swaps of $434 million and losses on cross currency interest rate swaps of $247 million, which were partially offset by gains on pay fixed interest rate swaps of $536 million and gains on foreign currency revaluation of debt of $4 million.
Provision for credit losses
Provision for credit losses increased primarily due to the increase in acquisition of retail loans. The increase was also attributable to the increasing trend of delinquencies and net charge-offs. See "-Financial Condition-Credit Risk" below for more information.
Early termination loss on operating leases
Early termination losses on operating leases increased due to increases in realized losses, our estimate of early termination losses and acquisition volumes. See -Financial Condition-Credit Risk" below for more information.
Canada Segment
Revenues
-Revenue from retail loans increased due to higher yields and higher average outstanding balances.
-Revenue from dealer loans decreased due to lower yields which was partially offset by higher average outstanding balances primarily of wholesale flooring loans as a result of higher dealer inventory levels and the effect of foreign currency translation adjustments.
-Operating lease revenue decreased due to lower average outstanding units and the effect of foreign currency translation adjustments.
Leased vehicle expenses
Leased vehicle expenses decreased due to lower average outstanding units and the effect of foreign currency translation adjustments.
Interest expense
Interest expense decreased due to lower average interest rates and the effect of foreign currency translation adjustments which were partially offset by higher average outstanding debt. See "-Liquidity and Capital Resources" below for more information.
Realized (gains)/losses on derivative instruments
Net realized gains on interest rate swaps during fiscal year 2025 were attributable to realized gains on pay fixed interest rate swaps of $62 million, which were partially offset by realized losses on pay float interest rate swaps of $50 million.
Provision for credit losses
Provision for credit losses increased due to the increase in provision for retail loans as a result of higher expected losses due to an increase in the trend of delinquencies and charge-offs. See "-Financial Condition-Credit Risk" below for more information.
Early termination loss on operating leases
Early termination losses on operating leases decreased due to decreases in realized losses and our estimate of early termination losses. See "-Financial Condition-Credit Risk" below for more information.
Income tax expense
The consolidated effective tax rate was 26.0% for fiscal year 2025 and 28.6% for fiscal year 2024. The decrease in the effective tax rate for fiscal year 2025 was primarily attributable to a decrease in U.S. state taxes compared to the prior year. The Company's effective tax rate for fiscal year 2025 differs from the U.S. federal statutory tax rate primarily as a result of U.S. state taxes. For additional information regarding income taxes, see Note 7-Income Taxes of Notes to Consolidated Financial Statements.
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,
2025 2024 2023
Acquired
Sponsored (2)
Acquired
Sponsored (2)
Acquired
Sponsored (2)
(Units (1)in thousands)
United States Segment
Retail loans:
New automobile 582 417 557 342 301 165
Used automobile 135 35 156 38 113 30
Motorcycle and other 86 31 78 18 58 1
Total retail loans 803 483 791 398 472 196
Leases 437 423 366 333 229 196
Canada Segment
Retail loans 91 53 86 14 64 23
Leases 47 42 42 16 37 28
Consolidated
Retail loans 894 536 877 412 536 219
Leases 484 465 408 349 266 224
_______________________
(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.
Consumer Financing Penetration Rates
The following table summarizes the percentage of AHM and/or HCI sales of new automobiles and motorcycles that were financed with either retail loans or leases that we acquired:
Years ended March 31,
2025 2024 2023
United States Segment
New automobile 71 % 68 % 53 %
Motorcycle 43 % 36 % 28 %
Canada Segment
New automobile 75 % 68 % 75 %
Motorcycle 33 % 23 % 17 %
Consolidated
New automobile 71 % 68 % 55 %
Motorcycle 42 % 35 % 27 %
Consumer Financing Asset Balances
The following table summarizes our outstanding retail loan and lease asset balances and units:
March 31, March 31,
2025 2024 2023 2025 2024 2023
(U.S. dollars in millions)
(Units (1)in thousands)
United States Segment
Retail loans:
New automobile $ 34,738 $ 30,591 $ 24,564 1,658 1,509 1,375
Used automobile 7,404 6,931 5,276 410 394 337
Motorcycle and other 1,412 1,245 1,137 205 189 176
Total retail loans $ 43,554 $ 38,767 $ 30,977 2,273 2,092 1,888
Investment in operating leases $ 27,316 $ 23,805 $ 23,853 899 853 954
Securitized retail loans (2)
$ 12,350 $ 9,210 $ 6,770 768 606 540
Canada Segment
Retail loans $ 4,627 $ 4,429 $ 3,777 293 279 264
Investment in operating leases $ 3,280 $ 3,573 $ 3,925 155 175 207
Securitized retail loans (2)
$ 619 $ 586 $ 446 56 45 26
Securitized investment in operating leases (2)
$ - $ - $ 168 - - 14
Consolidated
Retail loans $ 48,181 $ 43,196 $ 34,754 2,566 2,371 2,152
Investment in operating leases $ 30,596 $ 27,378 $ 27,778 1,054 1,028 1,161
Securitized retail loans (2)
$ 12,969 $ 9,796 $ 7,216 824 651 566
Securitized investment in operating leases (2)
$ - $ - $ 168 - - 14
_______________________
(1)A unit represents one retail loan or lease contract, as noted, that was outstanding as of the date shown.
(2)Securitized retail loans and investments in operating leases represent the portion of total managed assets that have been sold in securitization transactions but continue to be recognized on our balance sheet.
In the United States and Canada segments, retail loan acquisition volumes increased by 2% and 6%, respectively, and lease acquisition volumes increased by 19% and 12%, respectively, during fiscal year 2025 compared to fiscal year 2024 primarily due to the increase in sponsored program volumes. The increase in availability of new vehicles and sales, along with higher penetration rates also contributed to the increase in consumer financing volumes.
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,
2025 2024 2023
United States Segment
Automobile 29 % 28 % 28 %
Motorcycle 98 % 98 % 98 %
Other 17 % 18 % 16 %
Canada Segment
Automobile 29 % 28 % 29 %
Motorcycle 95 % 95 % 95 %
Other 94 % 93 % 94 %
Consolidated
Automobile 29 % 28 % 28 %
Motorcycle 98 % 97 % 97 %
Other 20 % 21 % 19 %
Wholesale Flooring Financing Percentage of Sales
The following table summarizes the percentage of AHM unit sales in the United States and/or HCI unit sales in Canada, as applicable, that we financed through wholesale flooring loans with dealerships:
Years ended March 31,
2025 2024 2023
United States Segment
Automobile 22 % 22 % 21 %
Motorcycle 98 % 98 % 98 %
Other 8 % 7 % 8 %
Canada Segment
Automobile 24 % 24 % 26 %
Motorcycle 89 % 90 % 91 %
Other 96 % 97 % 96 %
Consolidated
Automobile 22 % 22 % 22 %
Motorcycle 97 % 97 % 97 %
Other 14 % 14 % 12 %
Dealer Financing Asset Balances
The following table summarizes our outstanding dealer financing asset balances and units:
March 31, March 31,
2025 2024 2023 2025 2024 2023
(U.S. dollars in millions)
(Wholesale Flooring Units (1)in thousands)
United States Segment
Wholesale flooring loans:
Automobile $ 2,057 $ 1,826 $ 1,193 60 56 35
Motorcycle 555 549 428 62 66 58
Other 32 44 65 19 29 55
Total wholesale flooring loans $ 2,644 $ 2,419 $ 1,686 141 151 148
Commercial loans $ 1,295 $ 1,233 $ 855
Canada Segment
Wholesale flooring loans $ 359 $ 365 $ 258 42 48 45
Commercial loans $ 37 $ 35 $ 32
Consolidated
Wholesale flooring loans $ 3,003 $ 2,784 $ 1,944 183 199 193
Commercial loans $ 1,332 $ 1,268 $ 887
________________________
(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 or an increase in inflationary pressures, can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. We manage our exposure to credit risk in retail loans by monitoring and adjusting our underwriting standards, which affect the level of credit risk that we assume, pricing contracts for expected losses, and focusing collection efforts to minimize losses. We manage our exposure to credit risk for dealers through ongoing reviews of their financial condition and payment performance.
We are also exposed to credit risk on our portfolio of operating lease assets. We expect a portion of our operating leases to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on our operating leases and our management of the risk are similar to that of our consumer finance receivables.
Credit risk on dealer loans is affected primarily by the financial strength of the dealers within the portfolio, the value of collateral securing the financings, and economic and market factors that could affect the creditworthiness of dealers. We manage our exposure to credit risk in dealer financing by performing comprehensive reviews of dealers prior to establishing financing arrangements and monitoring the payment performance and creditworthiness of these dealers on an ongoing basis. In the event of default by a dealer, we seek all available legal remedies pursuant to related dealer agreements, guarantees, security interests on collateral, or liens on dealership assets. Additionally, we have agreements with AHM and HCI that provide for their repurchase of new, unused, undamaged and unregistered vehicles or equipment that have been repossessed from dealers who defaulted under the terms of their respective wholesale flooring agreements.
The allowance for credit losses is management's estimate of lifetime expected credit losses on the amortized cost basis of finance receivables. Additional information regarding credit losses is provided in the discussion of "-Critical Accounting Estimates-Allowance for Credit Losses and Estimated Early Termination Losses on Operating Lease Assets" 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:
United States Segment Canada Segment Consolidated
As of or for the years ended March 31,
2025 2024 2023 2025 2024 2023 2025 2024 2023
(U.S. dollars in millions)
Finance receivables:
Allowance for credit losses at beginning of period $ 340 $ 242 $ 204 $ 13 $ 11 $ 7 $ 353 $ 253 $ 211
Provision for credit losses 293 290 138 13 11 8 306 301 146
Charge-offs, net of recoveries (248) (192) (100) (14) (9) (3) (262) (201) (103)
Effect of translation adjustment - - - (1) - (1) (1) - (1)
Allowance for credit losses at end of period $ 385 $ 340 $ 242 $ 11 $ 13 $ 11 $ 396 $ 353 $ 253
Charge-offs as a percentage of average receivable balance (1)
0.54 % 0.50 % 0.31 % 0.28 % 0.19 % 0.08 % 0.52 % 0.47 % 0.28 %
Allowance as a percentage of ending receivable balance (1)
0.80 % 0.79 % 0.71 % 0.26 % 0.30 % 0.29 % 0.75 % 0.74 % 0.67 %
Delinquencies (60 or more days past due):
Delinquent amount (2)
$ 144 $ 117 $ 90 $ 7 $ 6 $ 3 $ 151 $ 123 $ 93
As a percentage of ending receivable balance (1),(2)
0.30 % 0.27 % 0.26 % 0.15 % 0.12 % 0.07 % 0.29 % 0.26 % 0.24 %
Operating leases:
Early termination loss on operating leases $ 135 $ 98 $ 38 $ 1 $ 2 $ - $ 136 $ 100 $ 38
________________________
(1)Ending and average receivable balances exclude the allowance for credit losses, unearned subvention income related to our incentive financing programs and deferred origination costs. Average receivable balances are calculated based on the average of each month's ending receivables balance for 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 loans, upon receipt of 100% of the payment when due and (ii) consumer finance receivables, upon receipt of 90% of the sum of the current monthly payment plus any overdue monthly payments. Delinquent amounts presented are the aggregated principal balances of delinquent finance receivables. Payments that were granted deferrals are not considered delinquent during the deferral period.
In the United States segment, we recognized a provision for credit losses on our finance receivables of $293 million and $290 million during fiscal year 2025 and 2024, respectively. The increase in provision for credit losses was due to higher retail loan acquisitions. Expected credit losses on our retail loans also increased due to the increasing trend of delinquencies and net charge-offs. The increase in net charge-offs was due to the increase in transaction prices. We recognized early termination losses on operating leases of $135 million and $98 million during fiscal year 2025 and 2024, respectively. Early termination losses on operating leases increased due to the increases in realized losses, our estimate of early termination losses, and acquisition volumes. The increase in operating lease delinquencies and forecasted unemployment rates contributed to the increase in our estimate of early termination losses.
In the Canada segment, we recognized a provision for credit losses on our finance receivables of $13 million and $11 million during fiscal year 2025 and 2024, respectively. Provision for credit losses increased due to the increase in provision for retail loans as a result of higher expected losses due to an increase in the trend of delinquencies and charge-offs. We recognized early termination losses on operating leases of $1 million and $2 million during fiscal year 2025 and 2024, respectively.
Lease Residual Value Risk
Contractual residual values of lease vehicles are determined at lease inception based on our expectations of used vehicle values at the end of their lease term. 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 dealers are sold through online and physical auctions. We are exposed to a risk of loss on the disposition of returned lease vehicles if the market values of leased vehicles at the end of their lease terms are less than their contractual residual values.
Operating lease vehicles are depreciated on a straight-line basis over the lease term to the lower of contract residual values or estimated end of term residual values. Adjustments to estimated end of term residual values are made prospectively on a straight-line basis over the remaining lease term. A review for impairment of our operating lease assets is performed whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured as to the amounts by which carrying amounts exceed their fair values. We did not recognize impairment losses due to declines in estimated residual values during fiscal year 2025. Additional information regarding lease residual values is provided in the discussion of "-Critical Accounting Estimates-Estimated End of Term Residual Values" below.
The following table summarizes our number of lease terminations and the method of disposition:
Years ended March 31,
2025 2024 2023
(Units (1)in thousands)
United States Segment
Termination units:
Sales at outstanding contractual balances (2)
366 448 453
Sales through auctions and dealer direct programs (3)
12 3 1
Total termination units 378 451 454
Canada Segment
Termination units:
Sales at outstanding contractual balances (2)
66 74 71
Sales through auctions and dealer direct programs (3)
- - -
Total termination units 66 74 71
Consolidated
Termination units:
Sales at outstanding contractual balances (2)
432 522 524
Sales through auctions and dealer direct programs (3)
12 3 1
Total termination units 444 525 525
_______________________
(1)A unit represents one terminated lease by their method of disposition during the period shown. Unit counts do not include leases that were terminated due to lessee defaults.
(2)Includes vehicles purchased by lessees or dealers for the contractual residual value at lease maturity or the outstanding contractual balance if purchased prior to lease maturity.
(3)Includes vehicles sold through online auctions and market-based pricing options under our dealer direct programs or through physical auctions.
Liquidity and Capital Resources
Our liquidity strategy is to fund current and future obligations through our cash flows from operations and our diversified funding programs in a cost and risk effective manner. Our cash flows are generally impacted by cash requirements related to the volume of finance receivable and operating lease acquisitions, various operating and funding costs, and dividend payments, 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 and loans. From time to time, AHFC also issues fixed rate short-term debt to AHM to fund general corporate operations. 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. 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, 2025, 2024 and 2023 includes foreign currency denominated debt, which was translated into U.S. dollars using the relevant exchange rates as of March 31, 2025, 2024 and 2023, as applicable. Additionally, the amounts in this section that are presented in "C$" (Canadian dollar) were converted into U.S. dollars solely for the convenience based on the exchange rate on March 31, 2025. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or that they could be converted into U.S. dollars at the rates indicated.
Summary of Outstanding Debt
The table below presents a summary of our outstanding debt by various funding sources:
Weighted average
contractual interest rate (1)
March 31, March 31,
2025 2024 2023 2025 2024 2023
(U.S. dollars in millions)
United States Segment
Unsecured debt:
Commercial paper $ 4,836 $ 4,499 $ 5,609 4.64 % 5.71 % 5.25 %
Related party debt 1,800 - - 4.59 % - % - %
Bank loans 1,250 900 1,099 5.15 % 6.21 % 5.70 %
Public MTN program 37,153 31,151 21,962 4.02 % 3.58 % 1.99 %
Total unsecured debt 45,039 36,550 28,670
Secured debt 11,816 8,813 6,444 4.81 % 4.48 % 2.19 %
Total debt $ 56,855 $ 45,363 $ 35,114
Canada Segment
Unsecured debt:
Commercial paper $ 1,186 $ 794 $ 766 3.20 % 5.20 % 4.70 %
Bank loans 850 904 795 3.70 % 5.89 % 5.59 %
Other debt 3,088 3,318 3,176 3.53 % 3.59 % 3.15 %
Total unsecured debt 5,124 5,016 4,737
Secured debt 568 538 483 3.88 % 5.91 % 5.48 %
Total debt $ 5,692 $ 5,554 $ 5,220
Consolidated
Unsecured debt:
Commercial paper $ 6,022 $ 5,293 $ 6,375 4.36 % 5.64 % 5.18 %
Related party debt 1,800 - - 4.59 % - % - %
Bank loans 2,100 1,804 1,894 4.56 % 6.05 % 5.66 %
Public MTN program 37,153 31,151 21,962 4.02 % 3.58 % 1.99 %
Other debt 3,088 3,318 3,176 3.53 % 3.59 % 3.15 %
Total unsecured debt 50,163 41,566 33,407
Secured debt 12,384 9,351 6,927 4.77 % 4.56 % 2.42 %
Total debt $ 62,547 $ 50,917 $ 40,334
_______________________
(1)Weighted average contractual interest rates for commercial paper are bond equivalent yields.
Commercial Paper
As of March 31, 2025, we had commercial paper programs in the United States of $7.0 billion and in Canada of C$2.5 billion ($1.7 billion). Interest rates on the commercial paper are fixed at the time of issuance. During fiscal year 2025, consolidated commercial paper month-end outstanding principal balances ranged from $5.1 billion to $7.4 billion.
Related Party Debt
From time to time, AHFC issues fixed rate debt to AHM to fund AHFC's general corporate operations. Interest rates are based on prevailing rates of debt with comparable terms. Generally, the term of related party debt is less than 120 days.
Bank Loans
During fiscal year 2025, AHFC entered into a $500 million and a $250 million fixed rate term loan agreement. HCFI entered into a 2-year floating rate loan for C$225 million ($156 million). As of March 31, 2025, we had bank loans denominated in U.S. dollars and Canadian dollars with fixed and floating interest rates, in principal amounts ranging from $104 million to $500 million. As of March 31, 2025, the remaining maturities of all bank loans outstanding ranged from22 days to approximately 4.5 years. The weighted average remaining maturities of all bank loans was1.2 years as of March 31, 2025.
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, 2025, management believes that AHFC and HCFI were in compliance with all covenants contained in our bank loan agreements.
Public Medium-Term Note (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 2024, AHFC increased its Public MTN program by filing a new prospectus supplement with the SEC under which it may issue from time to time up to $45.0 billion aggregate principal amount of Public MTNs, which includes the issuance of foreign currency denominated notes into international markets. The aggregate principal amount of MTNs offered under this program may be increased from time to time.
The Public MTNs may have original maturities of 9 months or more from the date of issue, may be interest bearing with either fixed or floating interest rates, or may be discounted notes. During fiscal year 2025, AHFC issued $6.0 billionof floating rate notes ranging from 12 months to 3 years. AHFC also issued $8.3 billion of fixed rate notes ranging from 25 months to 10 years in USD and EUR. The weighted average remaining maturities of all Public MTNs was 2.7 years as of March 31, 2025.
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, 2025, management believes that AHFC was in compliance with all covenants under the indenture.
The table below presents a summary of outstanding debt issued under our MTN Program by currency:
March 31,
2025 2024 2023
(U.S. dollars in millions)
U.S. dollar $ 29,196 $ 25,673 $ 17,868
Euro 6,090 3,656 2,867
Sterling 1,867 1,822 1,227
Total $ 37,153 $ 31,151 $ 21,962
Other Debt
HCFI issues privately placed Canadian dollar denominated notes, with either fixed or floating interest rates. During fiscal year 2025, HCFI issued C$500 million ($348 million) of fixed rate notes and C$200 million ($139 million) of floating rate notes. As of March 31, 2025, the remaining maturities of all of HCFI's Canadian notes outstanding ranged from 53 days to approximately 4.2 years. The weighted average remaining maturities of these notes was 2.2 years as of March 31, 2025.
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, 2025, management believes that HCFI was in compliance with all covenants contained in the privately placed notes.
Secured Debt
Asset-Backed Securities and Loans
We enter into securitization transactions for funding purposes. Our securitization transactions involve transferring pools of retail loans to bankruptcy-remote special purpose entities (SPEs). The SPEs are established to accommodate securitization structures, which have the limited purpose of acquiring assets, issuing asset-backed securities or loans, and making payments on the secured debt. Assets transferred to SPEs are considered legally isolated from us and the claims of our creditors. We continue to service the retail loans transferred to the SPEs. Investors in the secured debt issued by a SPE only have recourse to the assets of such SPE and do not have recourse to the assets of AHFC, HCFI, or our other subsidiaries or to other SPEs. The assets of SPEs are the only source of funds for repayment on the secured debt.
Our securitizations are structured to provide credit enhancements to investors in the secured debt issued by the SPEs. Credit enhancements can include the following:
•Subordinated certificates- securities issued by SPEs that are retained by us and are subordinated in priority of payment to the secured debt.
•Overcollateralization- securitized asset balances that exceed the balance of secured debt issued by SPEs.
•Excess interest- excess interest collections to be used to cover losses on defaulted loans.
•Reserve funds- restricted cash accounts held by the SPEs to cover shortfalls in payments of interest and principal required to be paid on the secured debt.
•Yield supplement accounts-restricted cash accounts held by SPEs to supplement interest payments on secured debt.
The risk retention regulations in Regulation RR of the Securities Exchange Act of 1934, as amended (Exchange Act), require the sponsor to retain an economic interest in the credit risk of the securitized assets, either directly or through one or more majority-owned affiliates. Standard risk retention options allow the sponsor to retain either an eligible vertical interest, an eligible horizontal residual interest, or a combination of both. AHFC has satisfied this obligation by retaining an eligible vertical interest of an amount equal to at least 5% of the principal amount of each class of note and certificate issued for the securitization transactions that were subject to this rule but may choose to use other structures in the future.
We are required to consolidate the SPEs in our financial statements, which results in the securitizations being accounted for as on-balance sheet secured financings. The securitized assets remain on our consolidated balance sheet along with the secured debt issued by the SPEs.
During fiscal year 2025, we issued secured debt through asset-backed securitizations totaling $9.6 billion, which were secured by assets with an initial balance of $10.5 billion.
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 20, 2026, a $2.1 billion credit agreement, which expires on February 25, 2026, and a $1.4 billion credit agreement, which expires on February 25, 2028. As of March 31, 2025, no amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.
HCFI maintains a C$2.0 billion ($1.4 billion) syndicated bank credit facility that includes a C$1.0 billion ($695 million) credit agreement, which expires on March 25, 2026, and a C$1.0 billion ($695 million) credit agreement, which expires March 25, 2027. As of March 31, 2025, no amounts were drawn upon under the HCFI credit agreements. HCFI intends to renew or replace the credit agreements prior to or on the expiration dates.
The credit agreements contain customary conditions to borrowing and customary restrictive covenants, including limitations on liens and limitations on mergers, consolidations and asset sales, and limitations on affiliate transactions. The credit agreements also require AHFC and HCFI to maintain a positive consolidated tangible net worth as defined in their respective credit agreements. The credit agreements, in addition to other customary events of default, include cross-default provisions and provisions for default if HMC does not maintain ownership, whether directly or indirectly, of at least 80% of the outstanding capital stock of AHFC or HCFI, as applicable. In addition, the AHFC and HCFI credit agreements contain provisions for default if HMC's obligations under the HMC-AHFC Keep Well Agreement or the HMC-HCFI Keep Well Agreement, as applicable, become invalid, voidable, or unenforceable. All of these conditions, covenants and events of default are subject to important limitations and exceptions under the agreements governing the credit agreements. As of March 31, 2025, management believes that AHFC and HCFI were in compliance with all covenants contained in the respective credit agreements.
Other Credit Agreements
AHFC maintains other committed lines of credit that allow the Company access to an additional $1.0 billion in unsecured funding with two banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales and a requirement for AHFC to maintain a positive consolidated tangible net worth. As of March 31, 2025, no amounts were drawn upon under these agreements. These agreements expire in September 2025. 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 April 1, 2019. We incurred expenses of $83 million, $67 million and $63 million during fiscal years 2025, 2024 and 2023, respectively, pursuant to these Support Compensation Agreements.
Indebtedness of Consolidated Subsidiaries
As of March 31, 2025, AHFC and its consolidated subsidiaries had $71.3 billion of outstanding indebtedness and other liabilities, including current liabilities, of which $19.2 billion consisted of indebtedness and liabilities of our consolidated subsidiaries. None of AHFC's consolidated subsidiaries had any outstanding preferred equity.
Material Cash Requirements
The following table summarizes our material cash requirements from contractual obligations, excluding lending commitments to dealers and derivative obligations, by fiscal year payment period, as of March 31, 2025:
Payments due by period
Total 2026 2027 2028 2029 2030 Thereafter
(U.S. dollars in millions)
Unsecured debt obligations (1)
$ 50,293 $ 19,132 $ 9,866 $ 7,385 $ 5,503 $ 1,754 $ 6,653
Secured debt obligations (1)
12,402 6,289 3,981 1,874 258 - -
Interest payments on debt (2)
5,673 2,009 1,290 861 548 352 613
Total $ 68,368 $ 27,430 $ 15,137 $ 10,120 $ 6,309 $ 2,106 $ 7,266
_______________________
(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, 2025.
(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, 2025.
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 Statementsfor 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 Statementsfor additional information on derivative instruments.
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 segment profit or loss when we evaluate segment performance. Refer to Note 14-Segment and Geographic Information of Notes to Consolidated Financial Statementsfor additional information about segment information and Note 5-Derivative Instruments of Notes to Consolidated Financial Statementsfor additional information on derivative instruments.
New Accounting Standards
Refer to Note 1(m)-Recently Issued Accounting Standards of Notes to Consolidated Financial Statements.
Critical Accounting Estimates
The application of certain accounting policies may require management to make estimates that affect our financial condition and results of operations. Critical accounting estimates require 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. Actual results could differ from these estimates which could have a material effect on our financial condition and results of operations in subsequent periods. Refer to Note 1-Summary of Business and Significant Accounting Policies of Notes to Consolidated Financial Statementsfor information on our accounting policies related to our critical accounting estimates.
Allowance for Credit Losses on Retail Loans
Retail loans are evaluated on a collective basis and grouped into pools with similar risk characteristics such as origination quarter, internal credit grade at origination, product type, and original term. The allowance for retail loans is measured using econometric regression models that correlate vintage age, credit quality, economic, and other variables to historical vintage-level credit loss performance. Statistically relevant economic factors such as unemployment rates, bankruptcies, and used vehicle price indexes are applied in the analysis of the economic environment. Current and forecasted economic conditions are applied in the models to project monthly gross loss rates in terms of origination dollars for the remaining contractual life of each vintage. Recoveries are projected as a percentage of the cumulative forecasted loss dollar of each vintage. The contractual term is the estimated lifetime of retail loans and is considered to be a reasonable and supportable forecast period of future economic conditions. Economic forecasts and macroeconomic variables are obtained from a third-party economic research firm that extend through the lifetime of retail loans and converge to long-run equilibrium trends. Baseline forecasts that reflect the most likely economic future is the single economic scenario applied in the models. Qualitative adjustments may also be applied if management believes the quantitative models do not reflect the best estimate of lifetime expected credit losses.
Sensitivity Analysis
We applied the baseline economic scenarios for the United States and Canada that were obtained from a third-party economic research firm in our models to determine our allowance for credit losses on retail loans and estimated early termination losses on operating lease assets as of March 31, 2025. These baseline economic scenarios represent forecasts of the most likely economic future, with an equal probability of economic conditions being better or worse than forecasted. Alternative economic scenarios were also obtained from the third-party economic research firm. As an example of the sensitivity of our accounting estimates, we applied upside and downside economic scenarios in our models. The peak unemployment rate over the next 24-month period under the upside and downside economic scenarios in the United States was 3.7% and 8.3%, respectively. The resulting allowance for credit losses on retail loans under the upside and downside economic scenarios was $350 million and $588 million, respectively.
Estimated End of Term Residual Values
Estimated end of term residual values are dependent on the expected market values of leased vehicles at the end of their lease terms and the percentage of leased vehicles expected to be returned by lessees. Factors considered in this evaluation include, among other factors, economic conditions, external market information on new and used vehicles, historical trends, and recent auction values. Estimated return rates are dependent on expected market values of leased vehicles since declines in used vehicle prices generally increase the probability of vehicles being returned to us at the end of their lease terms. We also review our investment in operating leases for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured by the amount the carrying values exceed their fair values.
Sensitivity Analysis
If future expected end of term market values for all outstanding operating leases as of March 31, 2025 were to decrease by $100 per unit from our current estimates, the total impact would be an increase of approximately $31 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 $10 million in depreciation expense, which would be recognized over the remaining lease terms. This sensitivity analysis is specific to the conditions in effect as of March 31, 2025 and does not consider the effect declines in estimated end of term market values may have on return rates.
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