News Column

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

June 20, 2014

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 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 capabilities. 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 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.



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

We analyze our operations in two business segments defined by geography: the United States and Canada. We measure the performance of our United States and Canada segments on a pre-tax basis before the effect of valuation adjustments on derivative instruments and revaluations of foreign currency denominated debt. For additional information regarding our segments, see Note 15-Segment Information of Notes to Consolidated Financial Statements. The following tables and the related discussion are presented based on our geographically segmented consolidated financial statements.



Results of Operations

The following table provides our income before income taxes:

Years ended March 31, 2014 2013 2012 (U.S. dollars in millions) Income before income taxes: United States segment $ 1,238$ 1,466$ 1,809 Canada segment 207 186 181 Total income before income taxes $ 1,445$ 1,652$ 1,990



Comparison of Fiscal Years Ended March 31, 2014 and 2013

Our consolidated income before income taxes was $1,445 million in fiscal year 2014 compared to $1,652 million in fiscal year 2013. This decline of $207 million, or 13%, was primarily due to the loss on revaluation of foreign currency denominated debt of $111 million during fiscal year 2014 compared to a gain of $188 million during fiscal year 2013, an increase in the provision for credit losses of $85 million, a decline in operating lease revenue, net of depreciation, of $64 million, a decline in revenue from retail loans of $58 million, and a decline in revenue from direct financing leases of $30 million, which were partially offset by a decline in interest expense of $169 million, the gain on derivative instruments of $25 million during fiscal year 2014 compared to a loss of $143 million during the fiscal year 2013, and the decline in early termination losses on operating leases of $25 million. 21 --------------------------------------------------------------------------------



Comparison of Fiscal Years Ended March 31, 2013 and 2012

Our consolidated income before income taxes was $1,652 million in fiscal year 2013, compared to $1,990 million in fiscal year 2012. This decline of $338 million, or 17%, was primarily due to declines in revenue from retail loans of $184 million, direct financing leases of $24 million, and operating leases, net of depreciation, of $93 million. The decline in revenue from our consumer financing assets was partially offset by an increase in revenues from dealer loans of $23 million and a decline in interest expense of $41 million. The decline in consolidated income before income taxes was also attributable to a loss on derivative instruments of $143 million during fiscal year 2013 compared to a gain of $30 million during fiscal year 2012. The loss on derivative instruments during fiscal year 2013 was partially offset by an increase of $92 million in gains on revaluations of foreign currency denominated debt.



Segment Results-Comparison of Fiscal Years Ended March 31, 2014 and 2013

Results of operations for the United States segment and the Canada segment are summarized below: United States Segment Canada Segment Consolidated Years ended March 31, Years ended March 31, Years ended March 31, 2014 2013 2012 2014



2013 2012 2014 2013 2012

(U.S. dollars in millions) Revenues: Direct financing leases $ - $ - $ - $ 188$ 218$ 242$ 188$ 218$ 242 Retail 1,192 1,245 1,419 176 181 191 1,368 1,426 1,610 Dealer 102 93 72 14 15 13 116 108 85 Operating leases 4,258 4,008 3,700 56 - - 4,314 4,008 3,700 Total revenues 5,552 5,346 5,191 434 414 446 5,986 5,760 5,637 Depreciation on operating leases 3,363 3,038 2,637 45 - - 3,408 3,038 2,637 Interest expense 530 665 696 107 141 151 637 806 847 Net revenues 1,659 1,643 1,858 282 273 295 1,941 1,916 2,153 Gain/(Loss) on disposition of lease vehicles 26 45 87 11 14 15 37 59 102 Other income 114 117 101 2 1 5 116 118 106 Total net revenues 1,799 1,805 2,046 295 288 315 2,094 2,093 2,361 Expenses: General and administrative expenses 331 307 308 56 58 58 387 365 366 Provision for credit losses 128 44 84 11 10 10 139 54 94 Early termination loss on operating leases 32 58 19 1 - - 33 58 19 Loss on lease residual values - - - 4 9 18 4 9 18 (Gain)/Loss on derivative instruments (38 ) 121 (56 ) 13 22 26 (25 ) 143 (30 ) (Gain)/Loss on foreign currency revaluation of debt 108 (191 ) (118 ) 3



3 22 111 (188 ) (96 ) Income before income

taxes $ 1,238$ 1,466$ 1,809$ 207$ 186$ 181$ 1,445$ 1,652$ 1,990 Revenues Revenue from retail loans in the United States segment declined by $53 million, or 4%, during fiscal year 2014 as compared to fiscal year 2013. This decline was 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. Revenue from retail loans in the Canada segment declined by $5 million, or 3%, due to the effect of foreign currency translation adjustments. Direct financing lease revenue, which is generated only in Canada, declined by $30 million, or 14%, during fiscal year 2014 as compared to fiscal year 2013. The decline in revenue was primarily attributable to 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 22 --------------------------------------------------------------------------------



leases acquired in the Canada segment were classified as direct financing leases. The decline in revenue was also due in part to the effect of foreign currency translation adjustments.

Operating lease revenue in the United States segment increased by $250 million, or 6%, during fiscal year 2014 as compared to fiscal year 2013. The increase in operating lease revenue during fiscal year 2014 was due to higher outstanding operating lease asset balances during the current fiscal year as compared to 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 $56 million during fiscal year 2014. Revenue from dealer loans increased by $9 million, or 10%, in the United States segment and declined by $1 million, or 7%, in the Canada segment during fiscal year 2014 as compared to fiscal year 2013. The increase in revenue in the United States segment was due to higher volumes of wholesale flooring loans outstanding during fiscal year 2014 as compared to fiscal year 2013. Subsidy income from AHM and HCI sponsored incentive programs increased by $32 million, or 3%, to $1,028 million during fiscal year 2014 as compared to $996 million during 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 $325 million, or 11%, during fiscal year 2014 as compared to 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 in the United States. Depreciation on operating lease for the Canada segment totaled $45 million during fiscal year 2014. Operating lease revenue, net of depreciation, declined by $75 million, or 8%, in the United States segment during fiscal year 2014 as compared to fiscal year 2013, due to the lower interest rate environment which has resulted 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 $11 million during fiscal year 2014. Interest expense Interest expense declined by $135 million, or 20%, in the United States segment and $34 million, or 24%, in the Canada segment during fiscal year 2014 as compared to 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 $19 million, or 42%, in the United States segment and $3 million, or 21%, in the Canada segment during fiscal year 2014 as compared to 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 $84 million, or 191%, during fiscal year 2014 as compared to fiscal year 2013. The increase in the provision was the result of increasing our allowance for credit losses during fiscal year 2014 as compared to decreasing our allowance for credit losses during fiscal year 2013. The increase in the provision was also due to higher charge-offs during fiscal year 2014 as compared to fiscal year 2013. In the Canada segment, the provision for credit losses for fiscal year 2014 increased by $1 million compared to 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 $26 million, or 45%, during fiscal year 2014 as compared to fiscal year 2013. This decrease was the result of reducing our estimate of incurred losses during fiscal year 2014 as compared to increasing our estimate during fiscal year 2013. See "-Financial Condition-Credit Risk" below for more information. 23 --------------------------------------------------------------------------------



Loss on lease residual values

Losses on lease residual values in the Canada segment declined by $5 million, or 56%, during fiscal year 2014 as compared to 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 gain on derivative instruments of $38 million during fiscal year 2014 as compared to a loss of $121 million during fiscal year 2013. The gain in fiscal year 2014 was attributable to gains on cross currency swaps of $129 million which was partially offset by losses on interest rate swaps of $91 million. The gain on cross currency swaps was primarily attributable to the U.S. dollar weakening against the Euro during the current fiscal year. Losses on interest rate swaps were attributable to a general rise in long term interest rates and a general decline in short term interest rates during the current fiscal year. In the Canada segment, losses on derivative instruments declined by $9 million, or 41%, during fiscal year 2014 as compared to 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 $108 million during fiscal year 2014 as compared to a gain of $191 million during fiscal year 2013. The loss during 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 fiscal year 2013 were primarily attributable to gains on Euro and Yen denominated debt due to the strengthening of the U.S. dollar. In the Canada segment, we recognized a loss on the revaluation of foreign currency denominated debt of $3 million during fiscal years 2014 and 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 33.8% for fiscal year 2014 and 39.3% for fiscal year 2013. The main differences contributing to the decrease in the effective tax rate for fiscal year 2014 include a change of prior period deferred taxes, the reversal of unrecognized tax benefits, and the deduction for qualified domestic production. Our consolidated provision for income taxes for fiscal year 2014 was $489 million as compared to $650 million for fiscal year 2013. The decrease in the provision is largely due to the decrease in our income before tax in fiscal year 2014 as compared to fiscal year 2013. For additional information regarding income taxes, see Note 7-Income Taxes of Notes to Consolidated Financial Statements. 24 --------------------------------------------------------------------------------

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, 2014 2013 2012 Acquired Sponsored (2) Acquired Sponsored (2) Acquired Sponsored (2) (Units (1) in thousands) United States Segment Retail loans: New auto 674 505 521 353 501 388 Used auto 70 - 78 - 102 - Motorcycle 71 12 71 22 70 30 Power equipment and marine engines 1 1 1 - 1 - Total retail loans 816 518 671 375 674 418 Leases (3) 408 349 376 287 326 276 Canada Segment Retail loans: New auto 57 47 49 40 38 34 Used auto 18 9 26 15 23 14 Motorcycle 4 - 4 1 3 - Power equipment and marine engines 1 - 1 - - - Total retail loans 80 56 80 56 64 48 Leases (3) 57 55 49 48 54 53 Consolidated Retail loans: New auto 731 552 570 393 539 422 Used auto 88 9 104 15 125 14 Motorcycle 75 12 75 23 73 30 Power equipment and marine engines 2 1 2 - 1 - Total retail loans 896 574 751 431 738 466 Leases (3) 465 404 425 335 380 329



(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. 25

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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: Years ended March 31, 2014 2013 2012 United States Segment New auto 71 % 62 % 71 % Motorcycle 42 % 45 % 45 % Canada Segment New auto 69 % 67 % 73 % Motorcycle 18 % 21 % 18 % Consolidated New auto 71 % 63 % 71 % Motorcycle 39 % 43 % 43 % 26

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Consumer Financing Asset Balances

The following table summarizes our outstanding retail loan and lease asset balances and units: March 31, March 31, 2014 2013 2012 2014 2013 2012 (U.S. dollars in millions) (Units (1) in thousands) United States Segment Retail loans: New auto $ 27,018$ 24,011$ 22,984 1,799 1,650 1,616 Used auto 3,233 3,618 4,060 264 298 337 Motorcycle 886 907 987 187 202 226 Power equipment and marine engines 64 72 83 5 6 6 Total retail loans $ 31,201$ 28,608$ 28,114 2,255 2,156 2,185 Securitized retail loans (2) $ 7,999$ 7,218$ 6,819 699 658 606 Investment in operating leases $ 20,537$ 19,348$ 17,732 973 922 845 Canada Segment Retail loans: New auto $ 2,698 2,501 $ 2,302 184 169 162 Used auto 645 762 689 67 70 62 Motorcycle 60 64 71 11 12 15 Power equipment and marine engines 3 3 2 1 1 1 Total retail loans $ 3,406$ 3,330$ 3,064 263 252 240 Securitized retail loans (2) $ 178$ 364 $ - 24 30 - Direct financing leases $ 2,722$ 3,358$ 3,402 144 161 170 Investment in operating leases $ 693 $ - $ - 25 - - Consolidated Retail loans: New auto $ 29,716$ 26,512$ 25,286 1,983 1,819 1,778 Used auto 3,878 4,380 4,749 331 368 399 Motorcycle 946 971 1,058 198 214 241 Power equipment and marine engines 67 75 85 6 7 7



Total retail loans $ 34,607$ 31,938$ 31,178 2,518

2,408 2,425 Securitized retail loans (2) $ 8,177$ 7,582$ 6,819 723 688 606 Direct financing leases $ 2,722$ 3,358$ 3,402 144 161 170 Investment in operating leases $ 21,230$ 19,348$ 17,732 998 922 845



(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 fiscal year 2014 as compared to 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 fiscal year 2014 as compared to fiscal year 2013 due to the increase in incentive financing programs. 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 fiscal year 2014. Total retail loan and lease acquisitions also increased in the Canada segment during fiscal year 2014 as compared to fiscal year 2013. The outstanding direct financing lease asset balance declined during fiscal year 2014 as the result of the Canada segment accounting for a portion of newly acquired consumer lease contracts as operating leases. 27 --------------------------------------------------------------------------------



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:

March 31, 2014 2013 2012 United States Segment Automobile 29 % 27 % 26 % Motorcycle 97 % 96 % 94 % Power equipment and marine engines 24 % 25 % 25 % Canada Segment Automobile 34 % 33 % 32 % Motorcycle 99 % 99 % 95 % Power equipment and marine engines 93 % 99 % 91 % Consolidated Automobile 30 % 28 % 27 % Motorcycle 97 % 96 % 94 % Power equipment and marine engines 26 % 28 % 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:

Years ended March 31, 2014 2013 2012 United States Segment Automobile 29 % 29 % 27 % Motorcycle 96 % 96 % 97 % Power equipment and marine engines 8 % 9 % 10 % Canada Segment Automobile 32 % 30 % 32 % Motorcycle 95 % 95 % 92 % Power equipment and marine engines 95 % 96 % 95 % Consolidated Automobile 30 % 29 % 28 % Motorcycle 96 % 96 % 96 % Power equipment and marine engines 10 % 11 % 12 % 28

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Dealer Financing Asset Balances

The following table summarizes our outstanding dealer financing asset balances and units: March 31, March 31, 2014 2013 2012 2014 2013 2012 (U.S. dollars in millions) (Units (1) in thousands) United States Segment Wholesale flooring loans: Automobile $ 2,491$ 2,431$ 1,785 100 92 70 Motorcycle 701 641 531 107 98 78 Power equipment and marine engines 66 71 69 66 70 67 Total wholesale flooring loans $ 3,258$ 3,143$ 2,385 273 260 215 Commercial loans $ 572$ 431$ 390 Canada Segment Wholesale flooring loans: Automobile $ 395 505 $ 365 15 17 12 Motorcycle 82 85 76 11 11 10 Power equipment and marine engines 32 39 33 27 29 24 Total wholesale flooring loans $ 509$ 629$ 474 53 57 46 Commercial loans $ 32$ 5 $ - Consolidated Wholesale flooring loans: Automobile $ 2,886$ 2,936$ 2,150 115 109 82 Motorcycle 783 726 607 118 109 88 Power equipment and marine engines 98 110 102 93 99 91 Total wholesale flooring loans $ 3,767$ 3,772$ 2,859 326 317 261 Commercial loans $ 604$ 436$ 390 1



(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 fiscal year 2014 as compared to fiscal year 2013. This increase was attributable to higher new automobile sales by AHM and HCI. The percentage of automobile dealerships with wholesale flooring financing agreements increased by 2% during fiscal year 2014 which contributed to the increase in new automobile wholesale flooring loans during the fiscal year.



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 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. We expect a portion of our operating leases to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on our operating leases and our management of the risk are similar to that of our retail loans and direct financing leases. 29

-------------------------------------------------------------------------------- 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 continuously monitoring the payment performance and creditworthiness of these dealers. In the event of default by 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 of our finance receivables and losses related to lessee defaults on our operating leases:

As of or for the years ended March 31, 2014 2013 2012 (U.S. dollars in millions) United States Segment Finance receivables: Allowance for credit losses at beginning of period $ 80$ 146$ 179 Provision for credit losses 111 30 69 Charge-offs, net of recoveries (102 ) (96 ) (102 )



Allowance for credit losses at end of period $ 89 $

80 $ 146 Allowance as a percentage of ending receivable balance (1) 0.25 % 0.25 % 0.47 % Charge-offs as a percentage of average receivable balance (1) 0.30 % 0.30 % 0.33 % Delinquencies (60 or more days past due): Delinquent amount (2) $ 37$ 34$ 32 As a percentage of ending receivable balance (1), (2) 0.10 % 0.10 % 0.10 % Operating leases: Early termination loss on operating leases $ 32$ 58$ 19 Provision for past due operating lease rental payments (3) 17 14 15 Canada Segment Finance receivables: Allowance for credit losses at beginning of period $ 13$ 16$ 20 Provision for credit losses 11 10 10 Charge-offs, net of recoveries (12 ) (13 ) (14 ) Effect of translation adjustment (1 ) - -



Allowance for credit losses at end of period $ 11 $

13 $ 16 Allowance as a percentage of ending receivable balance (1) 0.16 % 0.17 % 0.22 % Charge-offs as a percentage of average receivable balance (1) 0.16 % 0.17 % 0.18 % Delinquencies (60 or more days past due): Delinquent amount (2) $ 6 $ 4 $ 5 As a percentage of ending receivable balance (1), (2) 0.08 % 0.06 % 0.07 % Operating leases: Early termination loss on operating leases $ 1 $ - $ - Provision for past due operating lease rental payments (3) - - - Consolidated Finance receivables: Allowance for credit losses at beginning of period $ 93$ 162$ 199 Provision for credit losses 122 40 79 Charge-offs, net of recoveries (114 ) (109 ) (116 ) Effect of translation adjustment (1 ) - -



Allowance for credit losses at end of period $ 100 $

93 $ 162 Allowance as a percentage of ending receivable balance (1) 0.24 % 0.23 % 0.42 % Charge-offs as a percentage of average receivable balance (1) 0.27 % 0.28 % 0.30 % Delinquencies (60 or more days past due): Delinquent amount (2) $ 43$ 38$ 37 As a percentage of ending receivable balance (1), (2) 0.10 % 0.10 % 0.10 % Operating leases: Early termination loss on operating leases $ 33$ 58$ 19 Provision for past due operating lease rental payments (3) 17 14 15 31

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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 year.

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

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

receivables, 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.

In the United States segment, we recognized a provision for credit losses on our finance receivables of $111 million during fiscal year 2014 as compared to $30 million in fiscal year 2013. During fiscal year 2014, the provision for credit losses that we recognized reflects an increase in our allowance for credit losses on our finance receivables of $9 million as compared to a reduction of our allowance for credit losses of $66 million during fiscal year 2013. The increase to our allowance during fiscal year 2014 was attributable primarily to the increase in our finance receivable acquisition volumes. The increase in the provision was also due in part to an increase in net charge-offs of $6 million. Delinquencies as of March 31, 2014 remained low and relatively consistent compared to March 31, 2013. Early termination losses on operating lease assets totaled $32 million during fiscal year 2014 as compared to $58 million during fiscal year 2013. This decrease was the result of reducing our estimate of incurred losses during fiscal year 2014 by $5 million as compared to increasing our estimate during fiscal year 2013 by $27 million. We revised our estimate of losses lower during fiscal year 2014 as actual loss and delinquency performance was better than we anticipated at the beginning of the fiscal year. In the Canada segment, the provision for credit losses increased by $1 million during fiscal year 2014 as compared to fiscal year 2013.



Lease Residual Value Risk

Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance) or through market based pricing programs. Returned lease vehicles that are not purchased by the grounding dealers are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values 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 fiscal years ended March 31, 2014, 2013 and 2012. 32

-------------------------------------------------------------------------------- The following table summarizes our number of lease terminations and the method of disposition: Years ended March 31, 2014 2013 2012 (Units (1) in thousands) United States Segment Termination units: Purchases at outstanding contractual balance (2) 210



197 191

Sales through auctions and dealer direct programs (3) 135

91 74 Total termination units 345 288 265 Canada Segment Termination units: Purchases at outstanding contractual balance (2) 40



43 46

Sales through auctions and dealer direct programs (3) 8

16 16 Total termination units 48 59 62 Consolidated Termination units: Purchases at outstanding contractual balance (2) 250



240 237

Sales through auctions and dealer direct programs (3) 143 107 90 Total termination units 393 347 327



(1) A unit represents one lease that was terminated during the fiscal year

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. 33

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Summary of Outstanding Debt

The table below shows a summary of our outstanding debt by various funding sources: Weighted average contractual interest rate March 31, March 31, 2014 2013 2012 2014 2013 2012 (U.S. dollars in millions)



United States Segment

Unsecured debt:

Commercial paper $ 2,927$ 3,805$ 2,219 0.15 % 0.20 % 0.24 %

Related party debt 3,225 3,246 3,440 0.14



% 0.17 % 0.22 %

Bank loans 5,389 5,389 5,888 0.71



% 1.07 % 1.27 %

Private U.S. MTN program 12,901 13,433 11,340 1.85 % 2.36 % 2.76 %

Public U.S. MTN program 3,736 - - 1.08 % - - Euro MTN programme 3,788 3,440 5,508 2.52



% 3.53 % 3.39 %

Total unsecured debt 31,966 29,313 28,395

Secured debt 8,062 7,281 6,825 0.65 % 0.74 % 1.11 % Total debt $ 40,028$ 36,594$ 35,220 Canada Segment Unsecured debt: Commercial paper $ 1,260$ 899$ 1,382 1.15 % 1.17 % 1.08 % Related party debt 1,538 1,474 1,301 1.27 % 1.29 % 1.28 % Bank loans 1,150 1,253 863 1.80 % 2.38 % 2.51 % Other debt 1,490 1,571 1,801 2.12 % 4.03 % 4.97 % Total unsecured debt 5,438 5,197 5,347 Secured debt 168 358 - 1.52 % 1.52 % - Total debt $ 5,606$ 5,555$ 5,347 Consolidated Unsecured debt: Commercial paper $ 4,187$ 4,704$ 3,601 0.45 % 0.39 % 0.56 % Related party debt 4,763 4,720 4,741 0.51



% 0.52 % 0.51 %

Bank loans 6,539 6,642 6,751 0.90



% 1.32 % 1.43 %

Private U.S. MTN program 12,901 13,433 11,340 1.85 % 2.36 % 2.76 %

Public U.S. MTN program 3,736 - - 1.08 % - - Euro MTN programme 3,788 3,440 5,508 2.52



% 3.53 % 3.39 %

Other debt 1,490 1,571 1,801 2.12



% 4.03 % 4.97 %

Total unsecured debt 37,404 34,510 33,742

Secured debt 8,230 7,639 6,825 0.67 % 0.78 % 1.11 % Total debt $ 45,634$ 42,149$ 40,567 Commercial Paper As of March 31, 2014, we had commercial paper programs in the United States of $7.0 billion and in Canada of C$1.625 billion ($1.5 billion). The commercial paper programs are supported by committed lines of credit totaling approximately $8.2 billion. See "-Credit Agreements" below. Interest rates on commercial paper are fixed at the time of issuance. During fiscal year 2014, consolidated commercial paper month-end outstanding principal balances ranged from approximately $2.9 billion to $6.1 billion and the outstanding daily balance averaged $4.8 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

34 -------------------------------------------------------------------------------- terms. Generally, the term of these notes is less than 120 days. During fiscal year 2014, the consolidated related party debt month-end principal balances ranged from approximately $4.7 billion to $5.1 billion and the outstanding daily balance averaged $4.8 billion.



Bank Loans

During fiscal year 2014, AHFC and HCFI entered into variable interest rate term loan agreements for $500 million and C$250 million ($226 million), respectively. As of March 31, 2014, we had bank loans denominated in U.S. dollars and Canadian dollars with variable interest rates, in principal amounts ranging from approximately $45 million to $600 million. As of March 31, 2014, the remaining maturities of all bank loans outstanding ranged from 235 days to approximately 5.8 years. The weighted average remaining maturities on all bank loans was 2.6 years as of March 31, 2014. 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 March 31, 2014, management believes that 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 fiscal year 2014, AHFC issued approximately $3.0 billion aggregate principal amount of notes under the Rule 144A Private U.S. MTN Program (Private U.S. MTNs) with original maturities from approximately one year to three years. As of March 31, 2014, the remaining maturities of Private U.S. MTNs outstanding ranged from 8 days to approximately 7.5 years. The weighted average remaining maturities of Private U.S. MTNs was 2.0 years as of March 31, 2014. 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 March 31, 2014, management believes that 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. All 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 1933, 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 $5.0 billion in an aggregate principal amount of Medium Term Notes, Series A (Public U.S. MTNs) with the SEC. On February 12, 2014, AHFC increased the maximum aggregate principal amount of Public U.S. MTNs authorized for issuance and sale to $16.0 billion. 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 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 March 31, 2014, the remaining maturities of all Public U.S. MTNs outstanding ranged from 249 days to approximately 4.5 years. The weighted average remaining maturities of all Public U.S. MTNs was 2.6 years as of March 31, 2014. 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 March 31, 2014, management believes that AHFC was in compliance with all covenants under the indenture. 35 --------------------------------------------------------------------------------



Euro Medium Term Note Programme

The $11.0 billion Euro Medium Term Note Programme (Euro MTN) is listed on the Luxembourg Stock Exchange. Since August 8, 2013, AHFC has been the sole issuer under this program. During fiscal year 2014, AHFC issued $1.2 billion principal amount of Euro MTN with original maturities from approximately five to six years. As of March 31, 2014, the remaining maturities of all Euro MTNs outstanding ranged from 78 days to approximately 8.9 years. The weighted average remaining maturities of all Euro MTNs was 2.4 years as of March 31, 2014. 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 March 31, 2014, management believes that AHFC was in compliance with all covenants contained in the Euro MTNs.



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

March 31, 2014 2013 2012 (U.S. dollars in millions) U.S. dollar $ 942 25 % $ 813 24 % $ 713 13 % Japanese yen 373 10 % 515 15 % 1,599 29 % Euro 2,473 65 % 2,112 61 % 3,196 58 % Total $ 3,788 100 % $ 3,440 100 % $ 5,508 100 % Other Debt HCFI issues privately placed Canadian dollar denominated notes. During fiscal year 2014, HCFI issued C$950 million ($860 million) of these notes with an original maturity of 2.2 years to 5.3 years. As of March 31, 2014, the remaining maturities of all of HCFI's Canadian notes outstanding ranged from 329 days to approximately 4.7 years. The weighted average remaining maturities of these notes was 3.1 years as of March 31, 2014. 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, 2014, management believes that HCFI was in compliance with all covenants contained in the privately placed notes. Secured Debt Asset-Backed Securities We enter into securitization transactions for funding purposes. 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 the 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 the

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

36 -------------------------------------------------------------------------------- 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 fiscal year ended March 31, 2014, we issued notes through asset-backed securitizations totaling $5.8 billion, which were secured by consumer finance receivables with an initial principal balance of $5.9 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 March 31, 2014, 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 maintain committed lines of credit with various financial institutions. These credit agreements are primarily in place to support our commercial paper programs. If these lines were used, it would be in the form of short-term notes.

In March 2014, AHFC entered into a $3.5 billion 364 day credit agreement which terminates on March 6, 2015 and a $3.5 billion five year credit agreement which terminates on March 7, 2019. At March 31, 2014, no amounts were outstanding or repaid under the AHFC credit agreements. AHFC intends to renew or replace the credit agreements prior to or on their respective termination dates. In March 2014, HCFI entered into a C$1.3 billion ($1.2 billion) credit agreement which provides that HCFI may borrow up to C$500 million ($445 million) on a one year revolving basis and up to C$800 million ($712 million) on a five-year revolving basis. The one year tranche of the credit agreement terminates on March 24, 2015 and the five year tranche of the credit agreement terminates on March 24, 2019. At March 31, 2014, no amounts were outstanding or repaid under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the termination date of each respective tranche. The credit agreements contain customary conditions to borrowing and customary restrictive covenants, including limitations on liens and limitations on mergers, consolidations and asset sales. 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 March 31, 2014, management believes that 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 37

--------------------------------------------------------------------------------

financing transactions, any related party debt or any indebtedness outstanding as of March 31, 2014 under AHFC's and HCFI's bank loan agreements. 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 October 1, 2005. We incurred expenses of approximately $16 million, $15 million and $16 million during fiscal years 2014, 2013 and 2012, respectively, pursuant to this support compensation agreement. 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."



Indebtedness of Consolidated Subsidiaries

As of March 31, 2014, AHFC and its consolidated subsidiaries had approximately $53.9 billion of outstanding indebtedness and other liabilities, including current liabilities, of which approximately $14.5 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 15-Segment Information of Notes to Consolidated Financial Statements for additional information about segment information and Note 5-Derivative Instruments of Notes to Consolidated Financial Statements for additional information on derivative instruments.



Off-Balance Sheet Arrangements

We are not a party to off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our contractual obligations, excluding lending commitments to dealers and derivative obligations, by fiscal year payment period, as of March 31, 2014. Payments due by period Total 2015 2016 2017 2018 2019 Thereafter (U.S. dollars in millions) Debt obligations (1) $ 45,705$ 22,333$ 7,007$ 8,624$ 2,505$ 2,948$ 2,288 Interest payments on debt (2) 1,524 504 331 256 183 148 102 Operating lease obligations 30 8 4 3 3 2 10 Total $ 47,259$ 22,845$ 7,342$ 8,883$ 2,691$ 3,098$ 2,400



(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, 2014.

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

based on the applicable variable rates and/or exchange rates as of March 31,

2014. 38

-------------------------------------------------------------------------------- The obligations in the above table do not include certain lending commitments to dealers since the amount and timing of future payments is uncertain. Refer to Note 9-Commitments and Contingencies of Notes to Consolidated Financial Statements for additional information on these commitments. Our contractual obligations on derivative instruments are also excluded from the table above because our future cash obligations under these contracts are inherently uncertain. We recognize all derivative instruments on our consolidated balance sheet at fair value. The amounts recognized as fair value do not represent the amounts that will be ultimately paid or received upon settlement under these contracts. Refer to Note 5-Derivative Instruments of Notes to Consolidated Financial Statements for additional information on derivative instruments.



New Accounting Standards

Refer to Note 1(o) -Recently Adopted Accounting Standards and Note 1(p)-Recently Issued Accounting Standards of Notes to Consolidated Financial Statements.

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 specifically identified as impaired are collectively evaluated for impairment. Refer to Note 1(e)-Finance Receivables, Note 1(f)-Investment in Operating Leases and Note 1(i)-Vehicles Held for Disposition of Notes to Consolidated Financial Statements for additional information regarding charge-offs or write-downs of contractual balances of retail and dealer finance receivables and operating leases. 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. 39 --------------------------------------------------------------------------------



Sensitivity Analysis

If we had experienced a 10% increase in net charge-offs of finance receivables during the fiscal year ended March 31, 2014, our provision for credit losses would have increased by approximately $21 million. 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 March 31, 2014, 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

Contractual residual values of lease vehicles are determined at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance) or through market based pricing programs. Returned lease vehicles that are not purchased by the grounding dealer are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of lease term. We assess our estimates for end of term market values of the leased vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and 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.



Sensitivity Analysis

If future estimated auction values for all outstanding operating leases as of March 31, 2014 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 March 31, 2014, we would have recognized an increase of approximately $2 million and less than $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 March 31, 2014. 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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