News Column

AMERICAN HONDA FINANCE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 12, 2014

Cautionary Statement Regarding Forward-Looking Statements

Certain statements included herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "scheduled," or "anticipates" or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. In addition, all information included herein with respect to projected or future results of operations, cash flows, financial condition, financial performance, or other financial or statistical matters constitute forward-looking statements. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realized. The following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements:



declines in the financial condition or performance of HMC or the sales of

Honda or Acura products; changes in general business and economic conditions; fluctuations in interest rates and currency exchange rates;



the failure of our customers, dealers or counterparties in the financial

industry 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 vehicles we lease

at the end of their lease terms; changes or disruption in our funding sources or access to the capital markets; changes in our, or HMC's, credit ratings; increased competition from other financial institutions seeking to increase their share of financing of Honda and Acura products;



changes in laws and regulations, including as a result of recent financial

services legislation, and related costs; changes in GAAP; a failure or interruption in our operations; and



the other risks and uncertainties set forth in Part II, "Item 1A. Risk

Factors" below.

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.



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 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, 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 revenue and net income 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 often may not be reflected in our results of operations for that period. The amount of subsidy income we recognize in a fiscal period is dependent of 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 capabilities. Our competitive cost of funds is facilitated by the diversity of our funding sources, and effective interest rate and foreign currency exchange management. We manage expenses to increase our profitability, including adjusting staffing needs based upon our business volumes and centralizing support functions. Additionally, we use risk and compliance management practices to minimize credit and residual value risks and maintain compliance with our pricing, underwriting and servicing policies at the United States, Canadian, state and provincial levels. 31



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In our business operations, we incur costs related to funding, credit loss, residual value loss, and general and administrative expenses, among other expenses.

We analyze our operations in two business segments defined by geography: the United States and Canada. We measure the performance of our United States and Canada segments on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, see Note 14-Segment Information of Notes to Consolidated Financial Statements (Unaudited). The following tables and the related discussion are presented based on our geographically segmented consolidated financial statements. References to "C$" are to the Canadian dollar. This report contains translations of certain Canadian dollar amounts into U.S. dollars at the rate specified below solely for your convenience. These translations should not be construed as representations that the Canadian dollar amounts actually represent such U.S. dollar amounts or that they could be converted into U.S. dollars at the rate indicated. U.S. dollar equivalents for "C$" amounts are calculated based on the exchange rate on December 31, 2013 of 1.0623 per U.S. dollar.



Results of Operations

The following table provides our income before income taxes for the fiscal periods indicated: Three months ended Nine months ended December 31, December 31, 2013 2012 2013 2012 (U.S. dollars in millions)



Income before income taxes:

United States segment $ 294$ 339$ 870$ 1,147 Canada segment 58 59 164 144



Total income before income taxes $ 352$ 398$ 1,034$ 1,291

Comparison of the Three Months Ended December 31, 2013 and 2012

Our consolidated income before income taxes was $352 million for the third quarter of fiscal year 2014 compared to $398 million for the same period in fiscal year 2013. This decline of $46 million, or 12%, was primarily due to the loss on revaluation of foreign currency denominated debt of $13 million during the third quarter of fiscal year 2014 compared to a gain of $41 million during the same period in fiscal year 2013, a decline in operating lease revenue, net of depreciation, of $16 million, a decline in revenue from retail loans of $14 million, a decline in revenue from direct financing leases of $10 million, and an increase in the provision for credit losses of $9 million, which were partially offset by a decline in interest expense of $41 million and a decline in losses on derivative instruments of $16 million.



Comparison of the Nine Months Ended December 31, 2013 and 2012

Our consolidated income before income taxes was $1,034 million for the first nine months of fiscal year 2014 compared to $1,291 million for the same period in fiscal year 2013. This decline of $257 million, or 20%, was primarily due to the loss on the revaluation of foreign currency denominated debt of $100 million during the first nine months of fiscal year 2014 compared to the gain of $76 million during the same period in fiscal year 2013, an increase in the provision for credit losses of $72 million, a decline in revenue from retail loans of $60 million, a decline in operating lease revenue, net of depreciation, of $45 million, a decline in the gain on disposition of lease vehicles of $27 million, an increase in general and administrative expenses of $24 million, and a decline in revenue from direct financing leases of $19 million, which were partially offset by a decline in interest expense of $134 million, and a decline in early termination losses on operating leases of $16 million. 32



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Segment Results-Comparison of the Three Months Ended December 31, 2013 and 2012

Results of operations for the United States segment and the Canada segment for the fiscal periods indicated are summarized below:

United States Segment Canada Segment Consolidated Three months ended Three months ended Three months ended December 31, December 31, December 31, 2013 2012 2013 2012 2013 2012 (U.S. dollars in millions) Revenues: Direct financing leases $ - $ - $ 46$ 56$ 46$ 56 Retail loans 301 314 45 46 346 360 Dealer loans 25 23 3 4 28 27 Operating leases 1,072 1,017 19 - 1,091 1,017 Total revenues 1,398 1,354 113 106 1,511 1,460 Depreciation on operating leases 854 779 15 - 869 779 Interest expense 129 159 24 35 153 194 Net revenues 415 416 74 71 489 487 Gain/(Loss) on disposition of lease vehicles 9 12 3 6 12 18 Other income 28 21 1 - 29 21 Total net revenues 452 449 78 77 530 526 Expenses: General and administrative expenses 80 73 13 15 93 88 Provision for credit losses 33 24 1 1 34 25 Early termination loss on operating leases 15 16 - - 15 16 Loss on lease residual values - - 1 2 1 2 (Gain)/Loss on derivative instruments 17 27 5 11 22 38 (Gain)/Loss on foreign currency revaluation of debt 13 (30 ) - (11 ) 13 (41 ) Income before income taxes $ 294$ 339$ 58$ 59$ 352$ 398 Revenues Revenue from retail loans declined by $13 million, or 4%, in the United States segment and $1 million, or 2%, in the Canada segment during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The declines were attributable to the declining yields on our portfolio of retail loans. In recent years, higher yielding retail loans acquired in prior years have matured and have been replaced by lower yielding retail loans as a result of a lower interest rate environment and increased competition. Direct financing lease revenue, which is generated only in Canada, declined by $10 million, or 18%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The decline in revenue was attributable to lower yields and a decline in the outstanding direct financing lease asset balance. The decline in outstanding direct finance lease assets was the result of the Canada segment accounting for a portion of newly acquired consumer lease contracts as operating leases beginning in the second quarter of fiscal year 2014. Prior to that time, all leases acquired in the Canada segment were classified as direct financing leases. Operating lease revenue in the United States segment increased by $55 million, or 5%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in operating lease revenue during the third quarter of fiscal year 2014 was due to higher outstanding operating lease asset balances during the current period compared to the same period in fiscal year 2013, which was more than offset by an increase in depreciation as discussed below under "-Depreciation on operating leases". Operating lease revenue in the Canada segment totaled $19 million during the third quarter of fiscal year 2014. Revenue from dealer loans increased by $2 million, or 9%, in the United States segment and declined by $1 million, or 25%, in the Canada segment during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in revenue in the United States segment was due to a higher level of wholesale flooring loans outstanding during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. Subsidy income from AHM and HCI sponsored incentive programs increased by $6 million, or 2%, to $259 million during the third quarter of fiscal year 2014 compared to $253 million during the same period in fiscal year 2013. This increase was attributable to the cumulatively higher volume of incentive financing programs in recent fiscal years. 33



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Depreciation on operating leases

Depreciation on operating leases in the United States segment increased by $75 million, or 10%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013 primarily due to an increase in operating lease assets. The increase in depreciation was also attributable to lower estimated residual values due to declines in used vehicle prices. Depreciation on operating lease for the Canada segment totaled $15 million during the quarter. Operating lease revenue, net of depreciation, declined by $20 million, or 8%, in the United States segment during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013, due to the lower interest rate environment which results in lower rent charges on more recently acquired operating leases and the increase in depreciation due to lower estimated residual values. Operating lease revenue, net of depreciation, in the Canada segment totaled $4 million. Interest expense Interest expense declined by $30 million, or 19%, in the United States segment and $11 million, or 31%, in the Canada segment during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The decline in interest expense was primarily due to lower interest rates, which was partially offset by an increase in outstanding debt. The decline in interest rates was due to a combination of lower interest rates on variable rate debt, a change in the mix of funding sources, and the maturity of debt with higher interest rates. See "-Liquidity and Capital Resources" below for more information.



Gain/loss on disposition of lease vehicles

The gain on disposition of lease vehicles declined by $3 million, or 25%, in the United States segment and $3 million, or 50%, in the Canada segment during the third quarter of fiscal year 2014 as compared to the same period in fiscal year 2013. The decline in the United States segment was primarily due to a decline in used vehicle prices. The decline in the Canada segment was primarily due to a lower volume of returned lease vehicles.



Provision for credit losses

In the United States segment, the provision for credit losses increased by $9 million, or 38%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in the provision was the result of an increase in charge-offs and a smaller reduction to the allowance for credit losses during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. In the Canada segment, the provision for credit losses for the third quarter of fiscal year 2014 was consistent with the same period in fiscal year 2013. See "-Financial Condition-Credit Risk" below for more information.



Early termination losses on operating leases

Early termination losses on operating leases in the United States segment declined by $1 million, or 6%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The decline was due to a smaller increase in our estimate of incurred losses during the third quarter of fiscal year 2014 as compared to the same period in fiscal year 2013.

Loss on lease residual values

Losses on lease residual values in the Canada segment declined by $1 million during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013.

Gain/loss on derivative instruments

In the United States segment, losses on derivative instruments declined by $10 million, or 37%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. The loss in fiscal year 2014 of $17 million was attributable to losses on interest rate swaps of $27 million which was partially offset by gains on cross currency swaps of $10 million. Losses on interest rate swaps were attributable to a general rise in long term interest rates and a decline in short term interest rates during the period. The gain on cross currency swaps was primarily attributable to the U.S. dollar weakening against the Euro during the period. In the Canada segment, losses on derivative instruments declined by $6 million, or 55%, during the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013. See "-Derivatives" below for more information.



Gain/loss on foreign currency revaluation of debt

In the United States segment, we recognized a loss on the revaluation of foreign currency denominated debt of $13 million during the third quarter of fiscal year 2014 compared to a gain of $30 million during the same period in fiscal year 2013. The loss during the third quarter of fiscal year 2014 was primarily attributable to losses on Euro denominated debt as the U.S. dollar weakened against the Euro. In the Canada segment, there was no gain or loss on the revaluation of foreign currency denominated debt during the third quarter of fiscal year 2014 compared to a gain of $11 million the same period in fiscal year 2013. The Canada segment did not have any foreign currency denominated debt outstanding during the third quarter of fiscal year 2014. 34



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Income tax expense

Our consolidated effective tax rate was 36.9% for the third quarter of fiscal year 2014 and 36.4% for the same period in fiscal year 2013. Our consolidated provision for income taxes for the third quarter of fiscal year 2014 was $130 million compared to $145 million for the same period in fiscal year 2013. The decrease in the provision is primarily due to the decrease in our income before tax for the third quarter of fiscal year 2014 compared to the same period in fiscal year 2013.



Segment Results-Comparison of the Nine Months Ended December 31, 2013 and 2012

Results of operations for the United States segment and the Canada segment for the fiscal periods indicated are summarized below:

United States Segment Canada Segment Consolidated Nine months ended Nine months ended Nine months ended December 31, December 31, December 31, 2013 2012 2013 2012 2013 2012 (U.S. dollars in millions) Revenues: Direct financing leases $ - $ - $ 148$ 167$ 148$ 167 Retail loans 900 958 135 137 1,035 1,095 Dealer loans 76 68 11 12 87 80 Operating leases 3,175 2,979 26 - 3,201 2,979 Total revenues 4,151 4,005 320 316 4,471 4,321 Depreciation on operating leases 2,498 2,252 21 - 2,519 2,252 Interest expense 402 511 84 109 486 620 Net revenues 1,251 1,242 215 207 1,466 1,449 Gain/(Loss) on disposition of lease vehicles 9 34 9 11 18 45 Other income 85 75 2 1 87 76 Total net revenues 1,345 1,351 226 219 1,571 1,570 Expenses: General and administrative expenses 247 220 41 44 288 264 Provision for credit losses 91 19 8 8 99 27 Early termination loss on operating leases 28 44 - - 28 44 Loss on lease residual values - - 3 6 3 6 (Gain)/Loss on derivative instruments 12 (6 ) 7 20 19 14 (Gain)/Loss on foreign currency revaluation of debt 97 (73 ) 3 (3 ) 100 (76 ) Income before income taxes $ 870$ 1,147$ 164$ 144$ 1,034$ 1,291 Revenues Revenue from retail loans declined by $58 million, or 6%, in the United States segment and $2 million, or 1%, in the Canada segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. These declines were attributable to the declining yields on our portfolio of retail loans. In recent years, higher yielding retail loans acquired in prior years have matured and have been replaced by lower yielding retail loans as a result of a lower interest rate environment and increased competition. Direct financing lease revenue, which is generated only in Canada, declined by $19 million, or 11%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The decline in revenue was attributable to lower yields and a decline in the outstanding direct financing lease asset balance. The decline in outstanding direct finance lease assets was the result of the Canada segment accounting for a portion of newly acquired consumer lease contracts as operating leases beginning in the second quarter of fiscal year 2014. Prior to that time, all leases acquired in the Canada segment were classified as direct financing leases. Operating lease revenue in the United States segment increased by $196 million, or 7%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in operating lease revenue during the first nine months of fiscal year 2014 was due to higher outstanding operating lease asset balances during the current period compared to the same period in fiscal year 2013, which was more than offset by an increase in depreciation as discussed below under "-Depreciation on operating leases". Operating lease revenue in the Canada segment totaled $26 million during the first nine months of fiscal year 2014. Revenue from dealer loans increased by $8 million, or 12%, in the United States segment and declined by $1 million, or 8%, in the Canada segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in revenue in the United States segment was due to higher volumes of wholesale flooring loans outstanding during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. 35



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Subsidy income from AHM and HCI sponsored incentive programs increased by $27 million, or 4%, to $773 million during the first nine months of fiscal year 2014 compared to $746 million during the same period in fiscal year 2013. This increase was attributable to the cumulatively higher volume of incentive financing programs in recent fiscal years.



Depreciation on operating leases

Depreciation on operating leases in the United States segment increased by $246 million, or 11%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013, primarily due to an increase in operating lease assets. The increase in depreciation was also attributable to lower estimated residual values due to declines in used vehicle prices. Depreciation on operating lease for the Canada segment totaled $21 million during the first nine months of fiscal year 2014. Operating lease revenue, net of depreciation, declined by $50 million, or 7%, in the United States segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013, due to the lower interest rate environment which results in lower rent charges on more recently acquired operating leases and the increase in depreciation due to lower estimated residual values. Operating lease revenue, net of depreciation, in the Canada segment totaled $5 million. Interest expense Interest expense declined by $109 million, or 21%, in the United States segment and $25 million, or 23%, in the Canada segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The decline in interest expense was primarily due to lower interest rates, which was partially offset by an increase in outstanding debt. The decline in interest rates was due to a combination of lower interest rates on variable rate debt, a change in the mix of funding sources, and the maturity of debt with higher interest rates. See "-Liquidity and Capital Resources" below for more information.



Gain/loss on disposition of lease vehicles

The gain on disposition of lease vehicles declined by $25 million, or 74%, in the United States segment and $2 million, or 18%, in the Canada segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The decline in the United States segment was primarily due to a decline in used vehicle prices. The decline in the Canada segment was primarily due to lower volumes of returned lease vehicles.



Provision for credit losses

In the United States segment, the provision for credit losses increased by $71 million, or 374%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. During fiscal year 2014, the provision for credit losses that we recognized reflects a relatively stable allowance balance and charge-offs that remain near historically low rates. The provision was lower during fiscal year 2013 primarily as a result of reducing the allowance for credit losses to reflect our reduced estimate of incurred credit losses. In the Canada segment, the provision for credit losses for the first nine months of fiscal year 2014 was consistent with the same period in fiscal year 2013. See "-Financial Condition-Credit Risk" below for more information.



Early termination losses on operating leases

Early termination losses on operating leases in the United States segment declined by $16 million, or 36%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. Early termination losses that we recognized during fiscal year 2014 reflect a relatively stable estimate of incurred losses during fiscal year 2014. Early termination losses that we recognized during fiscal year 2013 were higher as a result of increasing our estimate of incurred losses during the period.



Loss on lease residual values

Losses on lease residual values in the Canada segment declined by $3 million, or 50%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013 due to an improvement in used vehicle prices in the Canadian market.



Gain/loss on derivative instruments

In the United States segment, we recognized a loss on derivative instruments of $12 million during the first nine months of fiscal year 2014 compared to a gain of $6 million during the same period in fiscal year 2013. The loss in fiscal year 2014 was attributable to losses on interest rate swaps of $110 million which was partially offset by gains on cross currency swaps of $98 million. Losses on interest rate swaps were attributable to a general rise in long term interest rates and a decline in short term interest rates during the period. The gain on cross currency swaps was primarily attributable to the U.S. dollar weakening against the Euro during the period. In the Canada segment, losses on derivative instruments declined by $13 million, or 65%, during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. See "-Derivatives" below for more information. 36



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Gain/loss on foreign currency revaluation of debt

In the United States segment, we recognized a loss on the revaluation of foreign currency denominated debt of $97 million during the first nine months of fiscal year 2014 compared to a gain of $73 million during the same period in fiscal year 2013. The loss during the first nine months of fiscal year 2014 was attributable to losses on Euro denominated debt in the United States segment as the U.S. dollar weakened against the Euro. The gains during the same period in fiscal year 2013 were primarily attributable to gains on Euro denominated debt as the U.S. dollar strengthened against the Euro during the period. In the Canada segment, we recognized a loss on the revaluation of foreign currency denominated debt of $3 million during the first nine months of fiscal year 2014 compared to a gain of $3 million during the same period in fiscal year 2013. The loss during fiscal year 2014 was attributable to a loss on U.S. dollar denominated debt which matured during the second quarter. The loss was the result of the Canadian dollar weakening against the U.S. dollar from the start of the fiscal year to the date of maturity.



Income tax expense

Our consolidated effective tax rate was 37.8% for the first nine months of fiscal year 2014 and 38.6% for the same period in fiscal year 2013. Our consolidated provision for income taxes for the first nine months of fiscal year 2014 was $391 million compared to $498 million for the same period in fiscal year 2013. The decrease in the provision is primarily due to the decrease in our income before tax in the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013.



Financial Condition

Consumer Financing

Consumer Financing Acquisition Volumes

The following table summarizes the number of retail loans and leases we acquired during the fiscal periods indicated and the number of such loans and leases acquired through incentive financing programs sponsored by AHM and HCI:

Three months ended December 31, Nine months ended December 31, 2013 2012 2013 2012 Acquired Sponsored (2) Acquired Sponsored (2) Acquired Sponsored (2) Acquired Sponsored (2) (Units (1) in thousands) United States Segment Retail loans: New auto 140 100 117 73 531 398 399 285 Used auto 19 - 17 - 52 - 60 - Motorcycle 17 5 18 6 57 11 58 20 Power equipment and marine engines - - - - 1 - 1 - Total retail loans 176 105 152 79 641 409 518 305 Leases (3) 88 78 78 56 307 257 286 232 Canada Segment Retail loans: New auto 14 11 12 10 48 40 40 34 Used auto 4 2 7 4 15 8 20 12 Motorcycle - - - - 3 - 3 - Power equipment and marine engines 1 - - - 1 - - - Total retail loans 19 13 19 14 67 48 63 46 Leases (3) 15 14 12 12 46 44 39 39 Consolidated Retail loans: New auto 154 111 129 83 579 438 439 319 Used auto 23 2 24 4 67 8 80 12 Motorcycle 17 5 18 6 60 11 61 20 Power equipment and marine engines 1 - - - 2 - 1 - Total retail loans 195 118 171 93 708 457 581 351 Leases (3) 103 92 90 69 353 301 325 271



(1) A unit represents one retail loan or lease, 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

our yield requirements and subsidy payments were not required.

(3) Includes operating leases for both segments and direct financing leases for

the Canada segment. 37



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Consumer Financing Penetration Rates

The following table summarizes the percentage of AHM and/or HCI sales of new automobiles and motorcycles that were financed either with retail loans or leases that we acquired for the fiscal periods indicated:

Three months ended Nine months ended December 31, December 31, 2013 2012 2013 2012 United States Segment New auto 62 % 55 % 71 % 62 % Motorcycle 41 % 42 % 42 % 46 % Canada Segment New auto 66 % 63 % 69 % 68 % Motorcycle 20 % 20 % 19 % 21 % Consolidated New auto 63 % 55 % 70 % 63 % Motorcycle 40 % 40 % 39 % 43 % 38



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Consumer Financing Asset Balances

The following table summarizes our outstanding retail loan and lease asset balances and units as of the periods indicated:

December 31, March 31, December 31, March 31, 2013 2013 2013 2013 (U.S. dollars in millions) (Units (1) in thousands)

United States Segment Retail loans: New auto $ 26,944$ 24,011 1,775 1,650 Used auto 3,318 3,618 271 298 Motorcycle 916 907 193 202 Power equipment and marine engines 67 72 6 6 Total retail loans $ 31,245$ 28,608 2,245 2,156 Securitized retail loans (2) $ 7,784 $ 7,218 689 658



Investment in operating leases $ 20,358$ 19,348

965 922 Canada Segment Retail loans: New auto $ 2,823 $ 2,501 182 169 Used auto 699 762 68 70 Motorcycle 63 64 12 12 Power equipment and marine engines 3 3 1 1 Total retail loans $ 3,588 $ 3,330 263 252 Securitized retail loans (2) $ 221 $ 364 25 30 Direct financing leases $ 2,999 $ 3,358 150 161 Investment in operating leases $ 523 $ - 18 - Consolidated Retail loans: New auto $ 29,767$ 26,512 1,957 1,819 Used auto 4,017 4,380 339 368 Motorcycle 979 971 205 214 Power equipment and marine engines 70 75 7 7 Total retail loans $ 34,833$ 31,938 2,508 2,408 Securitized retail loans (2) $ 8,005 $ 7,582 714 688 Direct financing leases $ 2,999 $ 3,358 150 161



Investment in operating leases $ 20,881$ 19,348

983 922



(1) A unit represents one retail loan or lease, as noted, that was outstanding as

of the date shown.

(2) Securitized retail loans represent the portion of total retail loans that

have been sold in securitization transactions but continue to be recognized

on our balance sheet. Securitized retail loans are included in the amounts

for total retail loans.

Retail loan acquisition volumes in the United States segment increased during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The increase in retail loan acquisition volumes was primarily attributable to the increase in new automobile retail loans in the United States segment as a result of increased sales of new automobiles by AHM and an increase in incentive financing volume on retail loans. Operating lease acquisitions in the United States segment also increased during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013 due to the increase in incentive financing. The increase in incentive financing volume contributed to an increase in our consumer financing penetration rates on new automobiles and an increase in the total outstanding consumer financing asset balances during the first nine months of fiscal year 2014. Total retail loan and lease acquisitions also increased in the Canada segment during the first nine months of fiscal year 2014 compared to the same period in fiscal year 2013. The outstanding direct financing lease asset balance declined during the first nine months of fiscal year as the result of the Canada segment accounting for a portion of newly acquired consumer lease contracts as operating leases. 39



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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 authorized Honda and Acura dealerships in the United States and/or Canada, as applicable, as of the periods indicated: December 31, March 31, 2013 2013 United States Segment Automobile 29 % 27 % Motorcycle 96 % 96 % Power equipment and marine engines 24 % 25 % Canada Segment Automobile 33 % 33 % Motorcycle 98 % 99 % Power equipment and marine engines 94 % 99 % Consolidated Automobile 30 % 28 % Motorcycle 97 % 96 % Power equipment and marine engines 27 % 28 %



Wholesale Flooring Financing Percentage of Sales

The following table summarizes the percentage of AHM product sales in the United States and/or HCI product sales in Canada, as applicable, that we financed through wholesale flooring loans with dealerships during the fiscal periods indicated: Three months ended Nine months ended December 31, December 31, 2013 2012 2013 2012 United States Segment Automobile 30 % 30 % 30 % 29 % Motorcycle 96 % 96 % 96 % 96 % Power equipment and marine engines 9 % 16 % 8 % 12 % Canada Segment Automobile 29 % 28 % 32 % 30 % Motorcycle 95 % 95 % 96 % 96 % Power equipment and marine engines 96 % 95 % 96 % 96 % Consolidated Automobile 30 % 30 % 30 % 29 % Motorcycle 96 % 96 % 96 % 96 % Power equipment and marine engines 12 % 18 % 11 % 14 % 40



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Dealer Financing Asset Balances

The following table summarizes our outstanding dealer financing asset balances and units as of the periods indicated:

December 31, March 31, December 31, March 31, 2013 2013 2013 2013 (U.S. dollars in millions) (Units (1) in thousands)

United States Segment Wholesale flooring loans: Automobile $ 2,593 $ 2,431 105 92 Motorcycle 543 641 85 98 Power equipment and marine engines 57 71 47 70



Total wholesale flooring loans $ 3,193 $ 3,143

237 260 Commercial loans $ 552 $ 431 Canada Segment Wholesale flooring loans: Automobile $ 319 $ 505 11 17 Motorcycle 62 85 8 11 Power equipment and marine engines 26 39 16 29 Total wholesale flooring loans $ 407 $ 629 35 57 Commercial loans $ 24 $ 5 Consolidated Wholesale flooring loans: Automobile $ 2,912 $ 2,936 116 109 Motorcycle 605 726 93 109 Power equipment and marine engines 83 110 63 99



Total wholesale flooring loans $ 3,600 $ 3,772

272 317 Commercial loans $ 576 $ 436



(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.

The average outstanding balance of wholesale flooring loans was higher during the first nine months of fiscal year 2014 as compared to the same period in fiscal year 2013. This increase was attributable to higher new automobile sales by AHM and HCI and a slight increase in the percentage of these sales that were financed through wholesale flooring loans. The percentage of automobile dealerships with wholesale flooring financing agreements increased by 2% during the first nine months of fiscal year 2014 which contributed to the increase in new automobile wholesale flooring loans during the period. The outstanding consolidated wholesale flooring loan balance declined from $3.8 billion as of March 31, 2013 to $3.6 billion as of December 31, 2013 due to a decline in the Canada segment which is common for their historical seasonality.



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 on our portfolio of consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment rates 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, and focusing collection efforts to minimize losses. We are also exposed to credit risk on our portfolio of operating lease assets. When lessees default on their contractual obligations, we expect a portion of our operating leases to terminate prior to their scheduled maturities. 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. 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 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 continuously monitoring the payment performance and creditworthiness of dealers with existing financing arrangements. In the event of default by 41



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a dealer, we seek all available legal remedies pursuant to the related dealer agreements and guarantees. Additionally, we have entered into agreements with AHM and HCI that provide for the repurchase of any new, unused, undamaged and unregistered vehicle or equipment repossessed by us from a dealer in the United States and Canada, respectively, who defaulted under the terms of its wholesale flooring agreement with us at the net cost of the financing that we provided. 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 on past due operating lease rental payments.



Additional information regarding credit losses is provided in the discussion of "-Critical Accounting Policies-Credit Losses" below.

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The following table provides information with respect to our allowance for credit losses and credit loss experience on our finance receivables and losses related to lessee defaults on our operating leases as of or for the fiscal periods indicated:

As of or for the As of or for the three months ended nine months ended December 31, December 31, 2013 2012 2013 2012 (U.S. dollars in millions) United States Segment Finance receivables: Allowance for credit losses at beginning of period $ 86$ 92$ 80$ 146 Provision for credit losses 28 20 78 8 Charge-offs, net of recoveries (32 )



(31 ) (76 ) (73 )

Allowance for credit losses at end of period $ 82$ 81$ 82$ 81

Allowance as percentage of ending receivable balance (1) 0.23 % 0.25 % Charge-offs as percentage of average receivable balance (1), (4) 0.37 % 0.37 % 0.30 % 0.30 % Delinquencies (60 or more days past due) Delinquent amount (2) $ 71$ 72 As a percentage of ending receivable balance (1), (2) 0.20 % 0.22 % Operating leases: Early termination loss on operating leases $ 15$ 16$ 28$ 44 Provision for past due operating lease rental payments (3) 5 4 13 11 Canada Segment Finance receivables: Allowance for credit losses at beginning of period $ 14$ 17$ 13$ 16 Provision for credit losses 1 1 8 8 Charge-offs, net of recoveries (3 ) (3 ) (9 ) (9 ) Effect of translation adjustment - - - -



Allowance for credit losses at end of period $ 12$ 15$ 12$ 15

Allowance as percentage of ending receivable balance (1) 0.17 % 0.20 % Charge-offs as percentage of average receivable balance (1), (4) 0.14 % 0.18 % 0.16 % 0.17 % Delinquencies (60 or more days past due) Delinquent amount (2) $ 7$ 7 As a percentage of ending receivable balance (1), (2) 0.10 % 0.09 % Operating leases: Early termination loss on operating leases $ - $ - $ - $ - Provision for past due operating lease rental payments (3) - - - - Consolidated Finance receivables: Allowance for credit losses at beginning of period $ 100$ 109$ 93$ 162 Provision for credit losses 29 21 86 16 Charge-offs, net of recoveries (35 ) (34 ) (85 ) (82 ) Effect of translation adjustments - - - -



Allowance for credit losses at end of period $ 94$ 96$ 94$ 96

Allowance as percentage of ending receivable balance (1) 0.22 % 0.24 % Charge-offs as percentage of average receivable balance (1), (4) 0.33 % 0.33 % 0.27 % 0.28 % Delinquencies (60 or more days past due) Delinquent amount (2) $ 78$ 79 As a percentage of ending receivable balance (1), (2) 0.18 % 0.20 % Operating leases: Early termination loss on operating leases $ 15$ 6$ 28$ 44 Provision for past due operating lease rental payments (3) 5 4 13 11 43



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(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 period.

(2) For the purposes of determining whether a contract is delinquent, payment is

generally considered to have been made, in the case of (i) dealer finance

receivables, 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.

(3) Provisions for past due operating lease rental payments are also included in

total provision for credit losses in our consolidated statements of income.

(4) Percentages for the three and nine months ended December 31, 2013 and 2012

have been annualized.

In the United States segment, we recognized a provision for credit losses of $32 million and $90 million for the third quarter and first nine months of fiscal year 2014, respectively, compared to $24 million and $19 million for the same periods in fiscal year 2013. During fiscal year 2014, the provision for credit losses that we recognized reflects a relatively stable allowance for credit losses and charge-offs that remain near historically low rates. The provision was lower in fiscal year 2013 primarily as a result of reducing the allowance for credit losses to reflect our reduced estimate of incurred credit losses during the period. Delinquencies as of December 31, 2013 increased compared to March 31 and September 30, 2013 which is typical of our historical seasonality. Early termination losses on operating lease assets declined by $1 million and $16 million for the third quarter and first nine months of fiscal year 2014 compared to the same periods in fiscal year 2013. The relatively higher losses we recognized in fiscal year 2013 were attributable to an increase in our estimate of losses incurred during fiscal year 2013 which was due in part to a decline in used vehicle prices. In the Canada segment, the provision for credit losses increased by $1 million for both the third quarter and first nine months of fiscal year 2014 compared to the same periods in fiscal year 2013.



Lease Residual Value Risk

We establish contract residual values of lease vehicles at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. At the end of a lease term, lease customers have an option to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance). If a customer chooses to return the leased vehicle, the vehicle is either purchased by the dealer at its contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance) or market value or sold by us through used vehicle auctions. We are exposed to risk of loss on the sale of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term. 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 the expected loss severity. 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 estimated residual values are made on a straight line basis over the remaining term of the lease and are included as depreciation expense. For direct financing leases, downward adjustments for declines in estimated residual values deemed to be 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 Policies-Determination 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. There were no events or circumstances that indicated that the carrying values of our operating leases would not be recoverable during the first nine months of fiscal year 2014 and 2013. 44



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The following table summarizes our number of lease terminations and the method of disposition during the fiscal periods indicated:

Three months ended Nine months ended December 31, December 31, 2013 2012 2013 2012 (Units (1) in thousands) United States Segment Termination units: Purchases at outstanding contractual balance (2) 44 38 158 144 Sales through auctions and dealer direct programs (3) 32 18 98 63 Total termination units 76 56 256 207 Canada Segment Termination units: Purchases at outstanding contractual balance (2) 9 11 32 33 Sales through auctions and dealer direct programs (3) 2 4 6 13 Total termination units 11 15 38 46 Consolidated Termination units: Purchases at outstanding contractual balance (2) 53 49 190 177 Sales through auctions and dealer direct programs (3) 34 22 104 76 Total termination units 87 71 294 253



(1) A unit represents one lease that was terminated 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, physical auctions, and market

based pricing programs direct to dealers.

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 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 strategies 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, related party debt 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. 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. 45



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Summary of Outstanding Debt

The table below shows a summary of our outstanding debt by various funding sources as of the periods indicated:

December 31, 2013 March 31, 2013 (Weighted average (Weighted average (U.S. dollars in contractual (U.S. dollars in contractual millions) interest rates) (1) millions) interest rates) (1) United States Segment Commercial Paper $ 3,434 0.16 % $ 3,805 0.20 % Related Party Debt 3,147 0.12 % 3,246 0.17 % Bank Loans 5,389 0.72 % 5,389 1.07 % Private U.S. MTN 12,899 1.85 % 13,433 2.36 % Public U.S. MTN 3,735 1.08 % - - Euro MTN 3,775 2.53 % 3,440 3.53 % Total Unsecured Debt 32,379 29,313 Secured Debt 7,811 0.67 % 7,281 0.74 % Total Debt $ 40,190 $ 36,594 Canada Segment Commercial Paper $ 1,173 1.16 % $ 899 1.17 % Related Party Debt 1,600 1.28 % 1,474 1.29 % Bank Loans 1,195 1.81 % 1,253 2.38 % Other Debt 1,550 2.13 % 1,571 4.03 % Total Unsecured Debt 5,518 5,197 Secured Debt 211 1.52 % 358 1.52 % Total Debt $ 5,729 $ 5,555 Consolidated Commercial Paper $ 4,607 0.41 % $ 4,704 0.39 % Related Party Debt 4,747 0.51 % 4,720 0.52 % Bank Loans 6,584 0.92 % 6,642 1.32 % Private U.S. MTN 12,899 1.85 % 13,433 2.36 % Public U.S. MTN 3,735 1.08 % - - Euro MTN 3,775 2.52 % 3,440 3.53 % Other Debt 1,550 2.13 % 1,571 4.03 % Total Unsecured Debt 37,897 34,510 Secured Debt 8,022 0.69 % 7,639 0.78 % Total Debt $ 45,919 $ 42,149



(1) Based on principal balance outstanding and applicable interest rates as of

each date indicated. Commercial Paper As of December 31, 2013, we had commercial paper programs in the United States of $6.0 billion and in Canada of C$1.625 billion ($1.5 billion). The commercial paper programs are supported by credit agreements of $6.0 billion and C$1.3 billion ($1.2 billion), respectively. See "-Credit Agreements" below. Under our commercial paper programs in the United States and in Canada we may borrow a minimum of $100,000 for periods from one day to 270 days and C$100,000 ($94,135) for periods from one day to one year, respectively. Interest rates on the commercial paper are fixed at the time of issuance. During the nine months ended December 31, 2013, consolidated commercial paper month-end outstanding principal balances ranged from approximately $2.9 billion to $6.1 billion and averaged $4.7 billion. Related Party Debt AHFC routinely issues fixed rate notes to AHM to help fund AHFC's general corporate operations. HCFI routinely 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. During the nine months ended December 31, 2013, the consolidated related party debt month-end principal balances ranged from approximately $4.7 billion to $5.1 billion and averaged $4.9 billion. 46



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Bank Loans

During the nine months ended December 31, 2013, AHFC and HCFI entered into variable interest rate term loan agreements for $800 and C$250 million ($235 million), respectively. As of December 31, 2013, we had bank loans denominated in U.S. dollars and Canadian dollars with variable interest rates, in principal amounts ranging from approximately $47 million to $600 million. As of December 31, 2013, the remaining maturities of all bank loans outstanding ranged from 325 days to approximately 6.1 years. The weighted average remaining maturities on all bank loans was 2.9 years as of December 31, 2013. Our bank loans contain customary restrictive covenants, including limitations on liens, limitations on mergers and 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 December 31, 2013, AHFC and HCFI were in compliance with all covenants contained in our bank loans.



U.S. Medium Term Note Programs

Private U.S. Medium Term Note Program

During the nine months ended December 31, 2013, AHFC issued approximately $3.0 billion aggregate principal amount of notes under the Rule 144A Private U.S. MTN Program, or Private U.S. MTNs, with original maturities from approximately one year to three years. As of December 31, 2013, the remaining maturities of all Private U.S. MTNs outstanding ranged from 98 days to approximately 7.7 years. The weighted average remaining maturities of all Private U.S. MTNs was 2.2 years as of December 31, 2013. Interest rates on the Private U.S. MTNs are fixed or variable. Private U.S. MTNs are 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 December 31, 2013, AHFC was in compliance with all covenants contained in the Private U.S. MTNs. AHFC no longer intends to issue U.S. medium term notes under the Private U.S. MTN Program. Future U.S. medium term notes are expected to be issued under the Public U.S. Medium Term Note Program described below.



Public U.S. Medium Term Note Program

On August 27, 2013, AHFC became a "well-known seasoned issuer" as defined in Rule 405 of the Securities Act of 1934, as amended. On September 25, 2013, AHFC established a public U.S. medium term note program that registered the offer and sale of up to $5 billion in an aggregate principal amount of Medium Term Notes, Series A, or Public U.S. MTNs, with the SEC. The Public U.S. MTNs may have original maturities of nine months or more from the date of issue, may be interest bearing with either fixed or variable interest rates, or may be discounted notes. The aggregate principal amount of Public U.S. MTNs offered under this program may be increased from time to time. During the third quarter of fiscal year 2014, AHFC issued $3.75 billion aggregate principal amount of Public U.S. MTNs, with original maturities from approximately one to five years. As of December 31, 2013, the remaining maturities of all Public U.S. MTNs outstanding ranged from 339 days to approximately 4.8 years. The weighted average remaining maturities of all Public U.S. MTNs was 2.8 years as of December 31, 2013. The Public U.S. 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 December 31, 2013, AHFC was in compliance with all covenants under the indenture. Soon after the filing of this Quarterly Report on Form 10-Q, we expect to register the offer and sale of up to an additional $11 billion of Public U.S. MTNs, which would increase the amount of Public U.S. MTNs that may be offered under this program to an aggregate principal amount of $16 billion.



Euro Medium Term Note Programme

The $11.0 billion Euro Medium Term Note Programme, or Euro MTN, is listed on the Luxembourg Stock Exchange. Since August 8, 2013, AHFC has been the sole issuer under this program. During the nine months ended December 31, 2013, AHFC issued $1.2 billion principal amount of Euro MTN with original maturities from approximately five to six years. As of December 31, 2013, the remaining maturities of all Euro MTNs outstanding ranged from 168 days to approximately 9.1 years. The weighted average remaining maturities of all Euro MTNs was 2.6 years as of December 31, 2013. 47



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Interest rates on the Euro MTNs are fixed or variable. Euro MTNs are 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 December 31, 2013, AHFC was in compliance with all covenants contained in the Euro MTNs.



Details of our outstanding Euro MTNs by currency is as follows:

December 31, 2013 March 31, 2013 (U.S. dollars in millions) U.S. dollar (1)$ 943 25 % $ 814 24 % Japanese yen (1) 365 10 % 515 15 % Euro (1) 2,474 65 % 2,115 61 % $ 3,782 100 % $ 3,444 100 %



(1) Excludes unamortized discount and fees of $7 million and $4 million at

December 31, 2013 and March 31, 2013, respectively. 48



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Other Debt

HCFI issues privately placed Canadian dollar denominated notes. During the nine months ended December 31, 2013, HCFI issued C$950 million ($894 million) of these notes with an original maturity of 2.2 years to 5.3 years. As of December 31, 2013, the remaining maturities of all of HCFI's Canadian notes outstanding ranged from 1.1 years to approximately 4.9 years. The weighted average remaining maturities of these notes was 3.3 years as of December 31, 2013. Secured Debt Asset-Backed Securities We enter into securitization transactions for funding purposes. Securitization transactions involve transferring pools of retail loans to statutory trusts. The trusts are special-purpose entities that we establish to accommodate securitization structures. Securitization trusts have the limited purpose of acquiring assets, issuing asset-backed securities, and making payments on the securities. Assets transferred to securitization trusts are considered to be legally isolated from us and the claims of our creditors. We continue to service the retail loans transferred to the trusts. Investors in the notes issued by a trust only have recourse to the assets of such trust and do not have recourse to AHFC, HCFI, or our other subsidiaries or to other trusts.



Our securitizations are structured to provide credit enhancements to investors in the notes issued by the trusts. Credit enhancements can include the following:

Subordinated certificates-which are securities issued by the trusts that

are retained by us and are subordinated in priority of payment to the notes. Overcollateralization-which occurs when the principal balance of securitized assets exceed the balance of securities issued by the trust. Excess interest-which allows excess interest collections to be used to cover losses on defaulted loans. Reserve funds-which are restricted cash accounts held by trusts to cover



shortfalls in payments of interest and principal required to be paid on

the notes. Yield supplement accounts-which are restricted cash accounts held by



trusts to supplement interest payments on notes.

We are required to consolidate the securitization trusts in our financial statements, which results in the securitizations being accounted for as on-balance sheet secured financings. The securitized receivables 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.



During the nine months ended December 31, 2013, we issued notes through asset-backed securitizations totaling $4.3 billion, which were secured by consumer finance receivables with an initial principal balance of $4.4 billion.

Asset-Backed Conduits

In September 2010, we entered into a receivables loan agreement with a bank-sponsored asset-backed commercial paper conduit to allow us access to additional secured funding. Under this agreement, we would transfer finance receivables to funding agents as collateral for debt issued by the funding agents who are contractually committed, at our option, to make advances to us of up to $500 million. This agreement was amended in September 2013 and terminates in September 2014. As of December 31, 2013, we had no amounts outstanding under this agreement. Our ability to obtain funding under this agreement is subject to us having a sufficient amount of assets eligible and any unused portion of this commitment may be terminated if the performance of the underlying assets deteriorates beyond specified levels.



Credit Agreements

We have two credit agreements that we maintain as back-up facilities for our commercial paper program. In March 2011, AHFC entered into a $6.0 billion credit agreement denominated in U.S. dollars pursuant to a credit agreement expiring on March 18, 2014. Outstanding borrowings under the AHFC credit facility bear interest, at AHFC's option, based on the base rate for base rate loans or the specified LIBOR rate for Eurodollar loans plus the applicable margin. The base rate under the AHFC credit agreement is the higher of (i) the federal funds rate plus 0.50%, (ii) the prime rate determined by the administrative agent, or (iii) the one month LIBOR rate plus 1.00%. At December 31, 2013, no amounts were outstanding under the AHFC credit agreement. AHFC intends to renew its facility prior to its current expiration. 49



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In March 2013, HCFI entered into a C$1.3 billion ($1.2 billion) credit agreement denominated in Canadian dollars pursuant to a credit agreement expiring on March 24, 2014. Borrowings under the HCFI credit agreement are based on a prime rate plus an applicable margin, which is determined based on HCFI's debt ratings. The prime rate under the HCFI credit agreement is the higher of (i) the prime rate determined by the administrative agent or (ii) the sum of (a) the average rate per annum on the Reuters Screen CDOR Page and (b) 1.00%. At December 31, 2013, no amounts were outstanding under the HCFI credit agreement. HCFI intends to renew its facility prior to its current expiration. The credit agreements contain customary conditions to borrowing and customary restrictive covenants, including limitations on liens and limitations on mergers and consolidations and asset sales. The credit agreements also require us to maintain a positive consolidated tangible net worth. 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 December 31, 2013, AHFC and HCFI were in compliance with all covenants contained in the credit agreements.



Keep Well Agreements

HMC has entered into separate keep well agreements with AHFC and HCFI. Pursuant to the Keep Well Agreements, HMC has agreed to, among other things:

own and hold, at all times, directly or indirectly, at least 80% of each

of AHFC's and HCFI's issued and outstanding shares of voting stock and not

pledge, directly or indirectly, encumber, or otherwise dispose of any such

shares or permit any of HMC's subsidiaries to do so, except to HMC or wholly owned subsidiaries of HMC;



cause each of AHFC and HCFI to, on the last day of each of AHFC's and

HCFI's respective fiscal years, have a positive consolidated tangible net

worth (with "tangible net worth" meaning (a) shareholders' equity less (b) any intangible assets, as determined in accordance with GAAP with



respect to AHFC and generally accepted accounting principles in Canada

with respect to HCFI); and ensure that, at all times, each of AHFC and HCFI has sufficient liquidity



and funds to meet their payment obligations under any Debt (with "Debt"

defined as AHFC's or HCFI's debt, as applicable, for borrowed money that

HMC has confirmed in writing is covered by the respective keep well

agreement) in accordance with the terms of such Debt, or where necessary,

HMC will make available to AHFC or HCFI, as applicable, or HMC will

procure for AHFC or HCFI, as applicable, sufficient funds to enable AHFC

or HCFI, as applicable, to pay its Debt in accordance with its terms. AHFC

or HCFI Debt does not include the notes issued by securitization trusts in

connection with AHFC's or HCFI's secured financing transactions, any

related party debt or any indebtedness outstanding as of December 31, 2013

under AHFC's and HCFI's bank loan agreements.

Indebtedness of Consolidated Subsidiaries

As of December 31, 2013, AHFC and its consolidated subsidiaries had approximately $54.3 billion of outstanding indebtedness and other liabilities, including current liabilities, of which approximately $14.4 billion consisted of indebtedness and liabilities of our consolidated subsidiaries, and none of AHFC's consolidated subsidiaries had outstanding any preferred equity.



Derivatives

We utilize derivative instruments to manage 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 manage the effects of interest rate fluctuations of our variable 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 statement 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 result of operations as evaluated by management. Realized gains and losses on derivative instruments, net of realized gains and losses on foreign currency denominated debt, are included in the measure of net revenues when we evaluate segment performance. Refer to Note 14-Segment Information of Notes to Consolidated Financial Statements (Unaudited) for additional information about segment information and Note 5-Derivative Instruments of Notes to Consolidated Financial Statements (Unaudited) for additional information on derivative instruments. 50



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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, for the periods indicated.

Payments due for the



twelve month periods ending December 31,

Total 2014 2015 2016 2017 2018 Thereafter (U.S. dollars in millions) Debt obligations (1) $ 45,996$ 20,541$ 8,181$ 7,932$ 3,225$ 3,822$ 2,295 Interest payments on debt (2) 1,582 500 360 264 189 146 123 Operating lease obligations 32 9 4 3 3 2 11 Total $ 47,610$ 21,050$ 8,545

$ 8,199$ 3,417$ 3,970$ 2,429



(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 December 31, 2013.

(2) Interest payments on variable rate and foreign currency denominated debt

based on the applicable variable rates and/or exchange rates as of

December 31, 2013.

The obligations in the above table do not include certain lending commitments to dealers since the amount and timing of future payments is uncertain. Refer to Note 8-Commitments and Contingencies of Notes to Consolidated Financial Statements (Unaudited) for additional information on these commitments. Our contractual obligations on derivative instruments are also excluded from the table above because our future cash obligations under these contracts are inherently uncertain. We recognize all derivative instruments on our consolidated balance sheet at fair value. The amounts recognized as fair value do not represent the amounts that will be ultimately paid or received upon settlement under these contracts. Refer to Note 5-Derivative Instruments of Notes to Consolidated Financial Statements (Unaudited) for additional information on derivative instruments.



New Accounting Standards

Refer to Note 1(c)-Recently Adopted Accounting Standards and Note 1(d)-Recently Issued Accounting Standards of Notes to Consolidated Financial Statements (Unaudited).

Critical Accounting Policies

Critical accounting policies are those accounting policies that require the application of our most difficult, subjective, or complex judgments, often requiring us to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition, cash flows, and results of operations. The impact and any associated risks related to these estimates on our financial condition, cash flows, and results of operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operation" where such estimates affect reported and expected financial results. Different assumptions or changes in economic circumstances could result in additional changes to the determination of the allowance for credit losses and the determination of 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 continuously monitored 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, and collateral types. Economic factors such as used vehicle prices, unemployment rates, and consumer debt service burdens are also incorporated when estimating losses. 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 receivables are individually evaluated for impairment when specifically identified as impaired. Dealer finance receivables are considered to be 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 dealerships' payment history, financial condition, and cash flows, and their ability to perform under the terms of the loans. Dealer loans that have not been 51



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specifically identified as impaired are collectively evaluated for impairment. See Note 2-Finance Receivables of Notes to Consolidated Financial Statements (Unaudited) for additional information regarding charge-offs or write-downs of contractual balances of retail and dealer finance receivables. 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. See Note 3-Investment in Operating Leases of Notes to Consolidated Financial Statements (Unaudited) for additional information.



Sensitivity Analysis

If we had experienced a 10% increase in net charge-offs of finance receivables during the twelve month period ended December 31, 2013, our provision for credit losses would have increased by approximately $21 million during the period. Similarly, if we had experienced a 10% increase in realized losses on the disposition of repossessed operating lease vehicles during the twelve month period ended December 31, 2013, we would have recognized an additional $9 million in early termination losses in our consolidated statement of income during the period.



Determination of Lease Residual Values

Contract 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 for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance). The returned lease vehicles are either purchased by the dealer at the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance) or market value or sold by us at used vehicle auctions. We have a risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles and proceeds from residual value insurance claims, if any, are less than the contractual residual values. We review our estimates of end of lease term market values of the vehicles we have leased, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles we expect to be returned by the lessee at the end of lease term and the expected loss severity. Factors considered in this evaluation include, among other factors, economic conditions, historical trends and market information on new and used vehicles. For direct financing leases, downward adjustments for declines in estimated residual values deemed to be other-than-temporary are recognized as a loss on lease residual values in the period in which the estimate changed. For operating leases, adjustments to estimated residual values are made on a straight-line basis over the remaining term of the lease and are included as depreciation expense.



Sensitivity Analysis

If future estimated auction values for all outstanding operating leases as of December 31, 2013 were to decrease by $100 per unit from our current estimates, the total impact would be an increase of approximately $48 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 $7 million in depreciation expense, which would be recognized over the remaining lease terms. Similarly, if the future estimated auction values were to decrease by $100 per unit and future return rates were to increase by one percentage point from our current estimates for all direct financing leases as of December 31, 2013, we would have recognized an increase of approximately $2 million and $1 million in losses on lease residual values, respectively. This sensitivity analysis may be asymmetric and is specific to the conditions in effect as of December 31, 2013. 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.


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Source: Edgar Glimpses


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