NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed American Honda Finance Corporation's (AHFC) short-term Issuer Default Rating (IDR) and commercial paper rating at 'F1'.
KEY RATING DRIVERS
Rating Linked to Parent: The rating affirmation of AHFC follows today's rating affirmation of AHFC's ultimate parent, Honda Motor Co. Ltd. (HMC, rated 'A/F1' by Fitch). AHFC's ratings are equalized with HMC's ratings, as Fitch views AHFC as a core subsidiary of HMC, as demonstrated by a high percentage of HMC's U.S. sales financed by AHFC, strong operational and financial linkages between the two companies, and a support (keep well) agreement provided indirectly by HMC to AHFC.
Strong Credit Quality: Robust and conservative underwriting standards have been a testament to AHFC's credit quality performance. The company recorded its lowest ever net loss rate at 0.28% in FY13 (ending March 31, 2013). 60+ day delinquencies have also remained solid and consistently below 0.20%. The net loss and 60+ day delinquency rates were 0.27% and 0.18%, respectively, for the nine months ended Dec. 31, 2013 (9M13). The increase in the delinquency rate was primarily due to typical seasonality experienced in the latter part of the year. Fitch expects asset quality performance will continue to remain solid in calendar year 2014 (CY14) but normalize from current levels driven by expected moderation in used car values.
Normalizing Operating Performance: AHFC's overall operating performance has begun to normalize after reaching record levels in FY10 and FY11, which was driven by reserve releases from improved credit performance and residual value gains due to unusually high used car values. Pre-tax income, excluding fair value changes related to derivatives and foreign currency revaluation of debt, measured $1.15 billion in 9M13, down 6% from $1.23 billion in 9M12. The decline was mainly due to increase in provision for credit losses and decline in the gain on disposition of vehicles partially offset by decline in interest expense. Still, adjusted pre-tax margin was a solid 25.8% in 9M13, compared to 28.4% in 9M12. Return on equity (annualized) was 7.9% in 9M13 and reflects the relatively lower leverage and higher capitalization of AHFC compared to its peers. Fitch expects AHFC to be solidly profitable in CY14. However, the company does face headwinds in terms of increased credit related costs, relatively higher interest expense from rising interest rates, and normalizing used car values which could reduce recoveries on repossessed cars and lease returns. Nonetheless, Fitch expects portfolio expansion and strong underwriting standards will help maintain profitability levels in CY14.
Conservative Leverage and Capitalization: AHFC's leverage, measured as debt to tangible equity, was 4.5x at Dec. 31, 2013. Tangible equity to total assets measured 15.7% at Dec. 31, 2013. Fitch believes these ratios are strong compared to AHFC's auto captive peers and other captive finance companies, considering the peer-superior credit quality performance of AHFC's loan and lease portfolio. Most captives manage their leverage ratios via dividend payments to their parent companies. However, HMC has never taken any dividends out of AHFC instead choosing the retain earnings at AHFC for growth purpose. Fitch views AHFC's conservative capital strategy positively and believes that its creditors benefit from a higher level of asset coverage compared to its peers.
Diversified Funding Sources: AHFC's funding profile has improved in recent years and includes diverse sources of funding including U.S. and Euro medium-term unsecured notes, unsecured bank loans, intercompany debt, commercial paper (CP), and asset-backed securitization (ABS) debt. Over the past several years, AHFC has lengthened the maturities of its long-term debt, which is improving its liquidity profile and reducing refinancing risk.
Adequate Liquidity Levels: AHFC primarily depends on diversified funding sources and cash flow from operations for its liquidity needs. As of Dec. 31, 2013, cash on balance sheet measured $443 million, which is relatively lower compared to some of its peers. Contingent liquidity is provided by a $7.0 billion undrawn bank credit facility with a consortium of banks and a $0.5 billion committed unfunded asset-backed commercial paper (ABCP) conduit. As of Dec. 31, 2013, AHFC had $20.5 billion of debt coming due within one year. However, a significant portion of this debt is commercial paper and related party debt, which is expected to roll over/refinance. Fitch also finds comfort in AHFC's low leverage levels, high quality of unencumbered loan/lease portfolio, and lack of dividend distributions to its parent which, to some extent, offset the relatively low level of absolute liquidity.
AHFC's ratings and Rating Outlook are linked to that of its parent, HMC. However, negative rating action could also be driven by a change in the perceived relationship between HMC and AHFC such that AHFC becomes a less core subsidiary of HMC. Additionally, a material weakening in the company's liquidity profile, asset quality or capitalization could also yield negative rating action. Since AHFC's ratings are linked to HMC's ratings, Fitch cannot envision a scenario where AHFC would be rated higher than its parent.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 1, 2014);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'U.S. Auto Asset Quality Review: 4Q13' (Feb. 27, 2014);
--'2014 Outlook: U.S. Finance and Leasing Companies' (Nov. 22, 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Rating FI Subsidiaries and Holding Companies
U.S. Auto Asset Quality Review: 4Q13 (Easing Underwriting Will Weigh on Credit Performance)
2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist)