CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed American Honda Finance Corporation's (AHFC) short-term Issuer Default Rating (IDR) and commercial paper rating at 'F1'. The rating affirmation of AHFC follows today's affirmation of AHFC's ultimate parent, Honda Motor Co. Ltd. (HMC, rated 'A/F1' by Fitch).
KEY RATING DRIVERS
AHFC's ratings are equalized with HMC's ratings, since 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.
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 0.18% in 1Q15 (ending June 30, 2014); 60+ day delinquencies have also remained solid and consistently below 0.20%. The net loss and 60+ day delinquency rates were 0.26% and 0.17%, respectively, for the nine months ended Dec. 31, 2014 (9M15). Delinquency rates and losses have crept up from FYE 2014 (March 31, 2014) 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 2015 (CY15) but normalize from current levels driven by expected moderation in used car values.
AHFC's overall operating performance continues 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 $1.18 billion in 9M15, up 3% from $1.15 billion in 9M14. The increase was primarily due to an increase in operating lease revenue partially offset by a decline in direct financing lease and retail revenues and an increase in depreciation expense on operating leases. Adjusted pre-tax margin was a solid 24.3% in 9M15, compared to 25.2% in 9M14. Return on equity (YTD annualized) was 8.9% in 9M15 and reflects the relatively lower leverage and higher capitalization of AHFC compared to its peers. Fitch expects AHFC to be solidly profitable in CY15 given expected portfolio expansion and their strong underwriting standards which have helped maintain strong asset quality. 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.
AHFC's leverage, measured as debt to tangible equity, was 4.2x at Dec. 31, 2014. Tangible equity to total assets measured 16.8% at Dec. 31, 2014. 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 to retain earnings at AHFC for growth purposes. 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.
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.
AHFC primarily depends on diversified funding sources and cash flow from operations for its liquidity needs. As of Dec. 31, 2014, cash on balance sheet measured $671 million, which is relatively lower compared to some of its peers. Contingent liquidity is provided by a $7 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 3Q15 ended Dec. 31, 2014, AHFC had $23.3 billion of debt coming due within one year. However, a significant portion of this debt is CP 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.
RATING SENSITIVITIES
AHFC's ratings 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.
Fitch has affirmed the following ratings:
AHFC
--Short-term IDR at 'F1'
--Commercial paper rating at 'F1'
Additional information is available on www.fitchratings.com.
Criteria and Related Research:
--'Global Non-Bank Financial Institutions Rating Criteria' (April 28, 2015)
--'2015 Outlook: Finance and Leasing Companies': (Nov. 18, 2014)
--'U.S. Auto Asset Quality Review: 4Q14' (Mar. 13, 2015).
Applicable Criteria and Related Research:
U.S. Auto Asset Quality Review: 4Q14 (Asset Quality Deteriorates Slightly; Continued Moderation Expected In 2015)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861807
2015 Outlook: Finance and Leasing Companies (Stable Credit Profiles Amid Sector Headwinds)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=807208
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984199
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