Fitch Affirms American Honda Finance Corp's 'F1' Rating

Business Wire, July 21, 2003

Business Editors

CHICAGO--(BUSINESS WIRE)--July 21, 2003

Fitch Ratings affirms the 'F1' short-term rating of American Honda Finance Corporation (AHFC). The rating is based upon the sound financial strength of both AHFC and its parent company, Honda Motor Company, Ltd (Honda), which bolsters AHFC via a support agreement. Rating strengths for AHFC consider AHFC's ownership and strategic importance to Honda Motors Ltd., solid asset quality performance over an extended time, and sound risk-adjusted capitalization for the rating, as measured by Fitch. Concerns center on the company's reliance on short-term sources of financing and inability to access broader public debt markets for financing.

AHFC is a wholly-owned subsidiary of American Honda Motors Inc. (AHM, which is ultimately owned by Honda) and includes the operations of Honda Canada Finance Inc. and Honda Lease Trust. AHFC provides financing for Honda vehicles, including cars, motorcycles, power and marine equipment and personal watercraft.

The U.S. commercial paper (CP) program is fully backstopped by committed credit facilities, with no MAC clauses, although the Canadian CP program is only required to be covered at a 75% level. Currently all unsecured debt issuance is currently done through private placements (144a), euro medium-term-notes or issuance of commercial paper. As AHFC grows, Fitch believes that AHFC should eventually access both the public markets (unsecured) and longer term debt issuance.

In terms of asset quality, AHFC has performed well, particularly in the current environment. AHFC has been affected less by loss severity issues since the value of Honda vehicles have held up better than other manufacturers, although sustained weakness in wholesale markets could pressure AHFC's net charge-offs. AHFC's earnings have become more volatile under FAS 133-'Accounting for Derivative Instruments and Hedging Activities,' since the company has elected not to apply hedge or cash flow accounting treatment in most cases, therefore, its must periodically incur non-cash mark-to-market gains/losses through income.

Ultimately AHFC is backstopped via a support agreement by its parent, Honda, which enjoys an extremely competitive global position based upon its capital and manufacturing efficiency and its reputation for producing high quality products. Honda earned JPY 426.6 billion in its fiscal year ended March, 2003 (up 17.6% versus prior year) on sales of JPY 7,971 billion (USD$66.3 billion). On a calendar year-to-date basis, Honda's sales in the key U.S. auto market are up 12.5% in a U.S. market that is down 2.4% on the same basis. In Europe, Honda's volume is also up a substantial 11.2% on the same basis. Performance in the Japanese market is off 15% due to dated product portfolio and certain issues in the distribution channel. Honda has substantial liquidity and profitability that is amongst the highest in the industry, which enables Honda to handle potential downturns in the volatile auto sector.