American Honda Finance Corp.’s heavy reliance on capital markets for funding and liquidity could spell trouble for the captive as the COVID-19 economic crisis worsens.
AHFC’s liquidity includes $7 billion in syndicated bank credit facilities and an additional $1 billion in committed bilateral lines of credit as of September 2019.
In addition, AHFC brought six deals to the securitization market in 2019, totaling upwards of $7.5 billion, further bolstering their access to funding. AHFC’s first deal of 2020 brought $1.75 billion of prime auto loans to market Jan. 7, according to Moody’s Investors Service.
In short, nearly half of AHFC’s liquidity comes from capital markets.
By comparison, Nissan Motor Acceptance Corp.’s liquidity clocks in at $15.9 billion as of December 31, 2019, which includes a $7 billion revolving credit facility. NMAC securitized three deals last year totaling $3.7 billion and has yet to securitize in 2020. NMAC’s originations totaled $20.7 billion. Most captive finance companies securitize once per quarter.
Still, there is a mounting concern that captives’ access to funding through capital markets will soften as spreads widen. Both Westlake Financial Services and Carvana saw widening spreads in their March 11 securitizations. Westlake’s 2020 ABS deal required the lender to pay investors in its tranche 200 basis points of yield. Last December, Westlake was paying 90 basis points. For Carvana, spreads doubled in its triple-B tranche to 290 basis points.
AHFC’s latest ABS deals have not experienced a widening in spreads yet.
In addition, captive finance companies are largely dependent on their parent companies for liquidity, according to Moody’s. The OEM posted a 48% year-over-year sales decline in March across its Honda and Acura brands, and a total sales decline of 19.8% in the first quarter. Honda previously suspended production in its automobile plants in the U.S. and Canada on March 23, due to depressed demand, and has since extended the halt through April 10.
Auto finance companies ultimately rely on the resilience of consumers and dealers to make monthly payments on their loans and leases to reduce debt outstanding on the ABS pools. As the negative impacts of the coronavirus pandemic continue to sink in for the auto industry and consumers, it is still unclear how much credit losses will increase. American Honda has issued $4.3 billion worth of loans in its dealer financial services operations for wholesale inventory and commercial loans, according to a December 2019 investor presentation.
AHFC’s portfolio consists of $31.4 billion in outstanding retail loans and $28.4 billion in leases for 3.4 million units as of December 19, 2019. Delinquencies 60 days past due were up 9 basis points year over year to 0.26% of the captive’s portfolio. Net charge-offs were up just 3 basis points to 0.47%.