Fitch Ratings has affirmed
Key Rating Drivers
The affirmation of AHFC's ratings is driven by the affirmation of
In addition to institutional support considerations, AHFC's credit profile is further supported by its solid credit performance, strong operating margins, low leverage compared to auto captive finance peers, and a predominately unsecured funding profile. Credit constraints include weaker balance sheet liquidity and coverage of short-term debt maturities.
AHFC's strong asset quality continues to compare favorably to peers, driven by the company's conservative underwriting standards. Industry wide, retail auto credit performance has been strong over the last year relative to historical levels but is expected to begin normalizing in 2022, as some of the pandemic-driven distortions that have been supportive of exceptionally strong consumer credit performance moderate.
Distortions include the unprecedented amount of government stimulus aimed at combating the impact of the pandemic, widespread lender forbearance/deferral programs, a curtailment of consumer discretionary purchases that has resulted in significantly higher savings rates, and a post pandemic surge in used vehicle prices.
AHFC reported a consolidated net charge-off rate of 0.07% on an annualized basis during the first half of fiscal 2022 (1H22; six months ended
AHFC has maintained solid profitability over the past several years. In the trailing six months ended
Fitch believes AHFC's profitability should continue to remain strong in 2022 as loan/lease origination volumes increase towards pre-pandemic levels and elevated used vehicle prices extend into next year due to strong consumer demand and continued supply constraints resulting from the semiconductor chip shortage.
AHFC's leverage, as measured by debt to tangible equity (excluding non-controlling interest), was 2.8x at 2Q22, which was slightly lower than the 3.0x from a year earlier. Fitch believes AHFC's leverage is low relative to auto captive peers, particularly when considering the peer-superior credit quality performance of AHFC's loan and lease portfolio. AHFC pays regular dividends to HMC in order to manage leverage near 3.0x. AHFC paid
AHFC's funding profile is predominantly unsecured and includes diverse sources of funding, including
As of
A substantial portion of debt, including the CP program and
The CP rating is equalized with AHFC's Short-Term IDR, reflecting that it ranks pari passu with the company's other senior unsecured obligations, and is supported by committed third party liquidity facilities from appropriately rated counterparties, which serve to ensure the timely repayment of such instruments.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade are limited by Fitch's view of HMC's credit profile. Fitch cannot envision a scenario where AHFC would be rated higher than its parent.
AHFC's Short-Term IDR is linked to that of its parent, HMC, and, therefore, is primarily sensitive to changes in HMC's Short-Term IDR.
AHFC's CP rating is equalized with the Short-Term IDR and would be expected to move in tandem.
Factors that could, individually or collectively, lead to negative rating action/downgrade include a change in the perceived relationship between HMC and AHFC, such that AHFC is no longer considered a core subsidiary of HMC by Fitch. Additionally, a material weakening in AHFC's liquidity profile, asset quality or capitalization could also result in negative rating actions for HMC and, therefore, AHFC.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
AHFC's ratings and Outlook are equalized with HMC, as Fitch considers AHFC a core subsidiary of HMC. This is supported by the high percentage of HMC's
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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