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TOYOTA MOTOR CREDIT CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this Form 10-Q are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on current expectations and currently available
information. However, since these statements are based on factors that involve
risks and uncertainties, our performance and results may differ materially from
those described or implied by such forward-looking statements. Words such as
"believe," "anticipate," "expect," "estimate," "project," "should," "intend,"
"will," "may" or words or phrases of similar meaning are intended to identify
forward-looking statements. We caution that the forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
may cause actual results to differ materially from those in the forward-looking
statements, including, without limitation, the risk factors set forth in "Part
II. Other Information - Item 1A. Risk Factors" and "Item 1A. Risk Factors" of
our Annual Report on Form 10-K ("Form 10-K") for the fiscal year ended March 31,
2021 ("fiscal 2021"), including the following:
• Risks related to health epidemics and other outbreaks;
• Changes in general business, economic, and geopolitical conditions,
including trade policy, as well as in consumer demand and the competitive
environment in the automotive markets in
• A decline in
label sales volume and the level of TMNA or any private label sponsored
subvention, cash, and contractual residual value support incentive
programs;
• Extreme weather conditions, natural disasters, changes in fuel prices,
manufacturing disruptions and production suspensions of
private label vehicles and related parts supply;
• Increased competition from other financial institutions seeking to
increase their share of financing Toyota , Lexus, and private label
vehicles;
• Changes in consumer behavior;
• Recalls announced by TMNA or private label companies and the perceived
quality ofToyota , Lexus, and any private label vehicles; • Availability and cost of financing;
• Failure or interruption in our operations, including our communications
and information systems, or as a result of our failure to retain existing
or to attract new key personnel;
• Increased cost, credit and operating risk exposure, or our failure to
realize the anticipated benefits, from our private label financial
services to third-party automotive and mobility companies, including
Mazda;
• Changes in our credit ratings and those of our ultimate parent, Toyota
• Changes in our financial position and liquidity, or changes or disruptions
in our funding sources or access to the global capital markets;
• Revisions to the estimates and assumptions for our allowance for credit
losses;
• Flaws in the design, implementation and use of quantitative models and
revisions to the estimates and assumptions that are used to determine the
value of certain assets;
• Fluctuations in the value or market prices of our investment securities;
• Changes in prices of used vehicles and their effect on residual values of
our off-lease vehicles and return rates;
• Failure of our customers or dealers to meet the terms of any contract with
us, or otherwise perform as agreed; • Fluctuations in interest rates and foreign currency exchange rates;
• Failure or changes in commercial soundness of our counterparties and other
financial institutions;
• Insufficient establishment of reserves, or the failure of a reinsurer to
meet its obligations, in our voluntary protection operations;
• Changes to existing, or adoption of new, accounting standards;
• A security breach or a cyber-attack;
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• Failure to maintain compliant enterprise data practices, including the
collection, use, sharing, and security of personally identifiable and
financial information of our customers and employees;
• Compliance with current laws and regulations or becoming subject to more
stringent laws, regulatory requirements and regulatory scrutiny; and
• Changes in the economies and applicable laws in the states where we have
concentration risk.
Forward-looking statements speak only as of the date they are made. We will not
update the forward-looking statements to reflect actual results or changes in
the factors affecting the forward-looking statements.
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OVERVIEW
Key Performance Indicators and Factors Affecting Our Business
In our finance operations, we generate revenue, income, and cash flows by providing retail, lease, and dealer financing to dealers and their customers. We measure the performance of our finance operations using the following metrics: financing volume, market share, net financing revenues, operating and administrative expense, residual value and credit loss metrics. In our voluntary protection operations, we generate revenue primarily through marketing, underwriting, and providing claims administration for products that cover certain risks of customers. We measure the performance of our voluntary protection operations using the following metrics: issued contract volume, average number of contracts in force, loss metrics and investment income. Our financial results are affected by a variety of economic and industry factors including, but not limited to, new and used vehicle markets,Toyota , Lexus, and private label new vehicle production and sales volume, vehicle sales and financing incentive programs, consumer behavior, employment levels, our ability to respond to changes in interest rates with respect to both contract pricing and funding, the actual or perceived quality, safety or reliability ofToyota , Lexus, and private label vehicles, the financial health of the dealers we finance, and competitive pressure. Our financial results may also be affected by the regulatory environment in which we operate, including as a result of new legislation or changes in regulation and any compliance costs or changes we may be required to make to our business practices. All of these factors can influence consumer contract and dealer financing volume, the number of consumer contracts and dealers that default and the loss per occurrence, our inability to realize originally estimated contractual residual values on leased vehicles, the volume and performance of our voluntary protection operations, and our net financing revenues on consumer and dealer financing volume. Changes in the volume of vehicle sales, sales of our voluntary protection products, or the level of voluntary protection expenses and insurance losses could materially and adversely impact our voluntary protection operations. Additionally, our funding programs and related costs are influenced by changes in the global capital markets, prevailing interest rates, and our credit ratings and those of our parent companies, which may affect our ability to obtain cost effective funding to support earning asset growth. 40 --------------------------------------------------------------------------------
Fiscal 2022 First Nine Months Operating Environment
During the first nine months of the fiscal year endingMarch 31, 2022 ("fiscal 2022"),the United States ("U.S.") economy continued to be impacted by the global coronavirus and related variants ("COVID-19") pandemic and the extraordinary governmental measures intended to slow its spread. In conjunction with increases in vaccination rates and the easing of restrictive measures in the current fiscal year, there has been improvement in unemployment levels and consumer confidence from fiscal 2021 pandemic lows, but neither have returned to pre-pandemic levels. There remains uncertainty around the duration and the severity of the COVID-19 pandemic, the timing and strength of the economy's recovery, and the impacts of government support and lender relief programs ending. In addition, along with the reopening of the US economy, inflation has increased in fiscal 2022 from pandemic lows in fiscal 2021. The impact of the COVID-19 pandemic on our future operations is difficult to predict, but the curtailment of economic activities as a result of further outbreak of COVID-19, extended or additional government restrictions intended to slow the spread of the virus, ending of government support programs, delayed consumer response to the lifting of restrictive measures, or permanent behavior changes in consumer spending could have further negative impact on consumer economics, dealerships, and auction sites, which could have a material adverse impact on our business, financial condition, and future results of operations. In addition, changes in the economy that adversely impact the consumer, such as inflation, higher interest rates, elevated debt levels and an increase in unemployment from the current levels could adversely impact our results of operations. Economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in dealer new vehicle inventory levels. This includes the global shortage of semiconductor chips and other parts and raw materials the automotive industry continues to face. The duration and severity of the supply chain disruptions and shortages, including but not limited to the semiconductor chips, are difficult to predict, but should these persist or become more severe, the negative impact to the manufacturers' vehicle production and new dealer inventory levels could adversely impact our results of operations. Average used vehicle values continued to increase in the first nine months of fiscal 2022 to historically high levels, primarily due to the lack of availability of new vehicles. Future declines in used vehicle values resulting from increases in the supply of new and used vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, depreciation expense and credit losses in the future. Conditions in the global capital markets were generally stable during the first nine months of fiscal 2022. We continue to maintain broad global access to both domestic and international markets. However, uncertainty regarding the course of the COVID-19 pandemic or future changes inU.S. monetary policy could cause disruptions in the capital markets and increase our funding costs during the remainder of the fiscal year. Future changes in interest rates in theU.S. and foreign markets could result in volatility in our interest expense, which could affect our results of operations. 41 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table summarizes total net income by our reportable operating
segments:
Three months ended Nine months ended
December 31, December 31,
(Dollars in millions) 2021 2020 2021 2020
Net income:
Finance operations 1 $ 655 $ 505 $ 2,015 $ 1,281
Voluntary protection operations 1 93 163 276 416
Total net income $ 748 $ 668 $ 2,291 $ 1,697
1 Refer to Note 13 - Segment Information of the Notes to Consolidated Financial
Statements for the total asset balances of our finance and voluntary protection
operations.
Our consolidated net income was$2,291 million and$748 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$1,697 million and$668 million for the same periods in fiscal 2021. The increase in net income for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to a$479 million decrease in interest expense, a$256 million decrease in provision for credit losses, a$201 million increase in total financing revenues, and a$84 million decrease in depreciation on operating leases, partially offset by a$206 million decrease in investment and other income, net, a$151 million increase in provision for income taxes, and a$75 million increase in operating and administrative expense. The increase in net income for the third quarter of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to a$145 million decrease in interest expense, a$73 million decrease in provision for credit losses, and a$17 million increase in total financing revenues, partially offset by a$103 million decrease in investment and other income, net, a$40 million increase in operating and administrative expense and an$18 million increase in provision for income taxes. Our overall capital position increased$2.3 billion , bringing total shareholder's equity to$17.9 billion atDecember 31, 2021 as compared to$15.6 billion atMarch 31, 2021 . Our debt increased to$110.1 billion atDecember 31, 2021 from$109.7 billion atMarch 31, 2021 . Our debt-to-equity ratio decreased to 6.2 atDecember 31, 2021 from 7.0 atMarch 31, 2021 . 42 --------------------------------------------------------------------------------
Finance Operations
The following table summarizes key results of our finance operations:
Three months ended
Nine months ended
December 31, Percentage December 31, Percentage
(Dollars in millions) 2021 2020 Change 2021 2020 change
Financing revenues:
Operating lease $ 2,081 $ 2,122 (2 )% $ 6,329 $ 6,365 (1 )%
Retail 830 749 11 % 2,442 2,144 14 %
Dealer 80 103 (22 )% 251 312 (20 )%
Total financing
revenues 2,991 2,974 1 % 9,022 8,821 2 %
Depreciation on
operating leases 1,460 1,450 1 % 4,400 4,484 (2 )%
Interest expense 346 491 (30 )% 1,055 1,534 (31 )%
Net financing
revenues 1,185 1,033 15 % 3,567 2,803 27 %
Investment and other
income, net 12 21 (43 )% 40 76 (47 )%
Net financing and
other revenues 1,197 1,054 14 % 3,607 2,879 25 %
Expenses:
Provision for credit
losses 45 118 (62 )% 110 366 (70 )%
Operating and
administrative
expenses 293 268 9 % 872 818 7 %
Total expenses 338 386 (12 )% 982 1,184 (17 )%
Income before income
taxes 859 668 29 % 2,625 1,695 55 %
Provision for income
taxes 204 163 25 % 610 414 47 %
Net income from
finance operations $ 655 $ 505 30 % $ 2,015 $ 1,281 57 %
Our finance operations reported net income of $2,015 million and $655 million
for the first nine months and third quarter of fiscal 2022, respectively,
compared to $1,281 million and $505 million for the same periods in fiscal
2021. The increase in net income from finance operations for first nine months
of fiscal 2022, compared to the same period in fiscal 2021 was due to a $479
million decrease in interest expense, a $256 million decrease in provision for
credit losses, a $201 million increase in total financing revenues, and a $84
million decrease in depreciation on operating leases, partially offset by a $196
million increase in provision for income taxes, a $54 million increase in
operating and administrative expenses, and a $36 million decrease in investment
and other income. The increase in net income from finance operations for the
third quarter of fiscal 2022, compared to the same period in fiscal 2021 was
primarily due to a $145 million decrease in interest expense, a $73 million
decrease in provision for credit losses, partially offset by a $41 million
increase in provision for income taxes, and a $25 million increase in operating
and administrative expenses.
Financing Revenues
Total financing revenues increased 2 percent and remained relatively unchanged
during the first nine months and third quarter of fiscal 2022, respectively, as
compared to the same periods in fiscal 2021 due to the following:
• Operating lease revenues remained relatively unchanged for first nine
months of fiscal 2022, compared to the same period in fiscal
2021. Operating lease revenues decreased 2% for the third quarter of
fiscal 2022, compared to the same period in fiscal 2021 primarily due to
lower yields partially offset by higher earning asset balances
outstanding.
• Retail financing revenues increased 14 percent and 11 percent for the
first nine months and third quarter of fiscal 2022, respectively, as
compared to the same periods in fiscal 2021, primarily due to higher
average outstanding earning asset balances partially offset by lower
yields.
• Dealer financing revenues decreased 20 percent and 22 percent for the
first nine months and third quarter of fiscal 2022, respectively, as
compared to the same periods in fiscal 2021, due to lower average
outstanding earning asset balances from lower average inventory levels
partially offset by higher yields.
As a result of the above, our total portfolio yield, which includes operating
lease, retail and dealer financing revenues, was 5.1 percent for the first nine
months and third quarter of fiscal 2022, respectively, compared to 5.1 percent
and 5.3 percent for the same periods in fiscal 2021.
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Depreciation on Operating Leases
We reported depreciation on operating leases of$4,400 million for the first nine months of fiscal 2022, compared to$4,484 million for the same period in fiscal 2021, primarily due to lower residual value losses as a result of continued historically high levels of average used vehicle values and lower average operating lease units outstanding. We reported depreciation on operating leases of$1,460 million for the third quarter of fiscal 2022, compared to$1,450 million for the same period in fiscal 2021. The economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles, which has led to higher off-lease vehicle purchases by dealers due to increased used vehicle values and decreased new vehicle inventory supply. 44
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Interest Expense Our liabilities consist mainly of fixed and variable rate debt, denominated inU.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily ofU.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. The following table summarizes the components of interest expense: Three months ended Nine months ended December 31, December 31, (Dollars in millions) 2021 2020 2021 2020 Interest expense on debt$ 362 $ 460 $ 1,134 $ 1,531 Interest expense on derivatives 23 103 137 334 Interest expense on debt and derivatives 385 563
1,271 1,865
(Gains) losses on debt denominated in foreign currencies (60 ) 655 (338 ) 1,703 Losses (gains) on foreign currency swaps 151 (658 ) 509 (1,754 ) Gains on U.S. dollar interest rate swaps (130 ) (69 ) (387 ) (280 ) Total interest expense$ 346 $ 491 $ 1,055 $ 1,534 During the first nine months and third quarter of fiscal 2022, total interest expense decreased to$1,055 million and$346 million , respectively, from$1,534 million and$491 million for the same periods in fiscal 2021. The decrease in total interest expense for the first nine months and third quarter of fiscal 2022 compared to the same periods in fiscal 2021 is primarily attributable to a decrease in interest expense on debt and derivatives combined and higher gains onU.S. dollar interest rate swaps, partially offset by losses on foreign currency swaps net of gains from debt denominated in foreign currencies. Interest expense on debt and derivatives primarily represents contractual net interest settlements and changes in accruals on secured and unsecured notes and loans payable and derivatives, and includes amortization of discounts, premiums, and debt issuance costs. During the first nine months and third quarter of fiscal 2022, interest expense on debt and derivatives decreased to$1,271 million and$385 million from$1,865 million and$563 million for the same periods in fiscal 2021. The decrease in interest expense on debt is due to a decrease in weighted average interest rates, partially offset by an increase in portfolio size. The decrease in interest expense on derivatives is primarily due to a decrease in interest expense on pay-fixed swaps partially offset by increase in interest expense on pay-float swaps. Gains or losses on debt denominated in foreign currencies represent the impact of translation adjustments. We use foreign currency swaps to economically hedge the debt denominated in foreign currencies. During the first nine months and third quarter of fiscal 2022, we recorded net losses of$171 million and$91 million , respectively, primarily as a result of increases in foreign currency swap rates across various currencies in which our debt is denominated. During the first nine months and third quarter of fiscal 2021, we recorded net gains of$51 million and$3 million , respectively, primarily as a result of decreases in foreign currency swap rates across various currencies in which our debt is denominated. Gains or losses onU.S. dollar interest rate swaps represent the change in the valuation of interest rate swaps. During the first nine months and third quarter of fiscal 2022, we recorded gains of$387 million and$130 million , respectively, primarily due to the upward shift ofU.S. dollar swap rates and net interest income on our pay-fixed swaps exceeding losses on our pay-float swaps. During the first nine months and third quarter of fiscal 2021, we recorded gains of$280 million and$69 million , respectively, as the impact from net interest income outweighed the losses attributed to the downward shift ofU.S. dollar swap rates. Future changes in interest and foreign currency exchange rates could continue to result in significant volatility in our interest expense, thereby affecting our results of operations. 45
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Investment and Other Income, Net
We recorded investment and other income, net of$40 million and$12 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$76 million and$21 million for the same periods in fiscal 2021. The decrease in investment and other income, net for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to lower average balances in our cash equivalents and investment in marketable securities portfolio. Provision for Credit Losses We recorded a provision for credit losses of$110 million and$45 million for the first nine months and third quarter of fiscal 2022, respectively, compared to a provision for credit losses of$366 million and$118 million for the same periods in fiscal 2021. The decrease in the provision for credit losses for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, was primarily a result of the improvement in macroeconomic conditions and the financial performance of our dealers in fiscal 2022. In contrast, in fiscal 2021, we increased the expected credit losses for our retail loan portfolio due to a decline in economic conditions caused by the COVID-19 pandemic and the restrictions designed to slow the spread of COVID-19, which resulted in stay-at-home orders, increased unemployment, and decreased consumer spending.
Operating and Administrative Expenses
We recorded operating and administrative expenses of$872 million and$293 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$818 million and$268 million for the same periods in fiscal 2021. The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2022, respectively, compared the same periods in fiscal 2021, was primarily due to an increase in employee and technology expenses. 46 --------------------------------------------------------------------------------
Voluntary Protection Operations
The following table summarizes key results of our voluntary protection
operations:
Three months ended Nine months ended
December 31, Percentage December 31, Percentage
2021 2020 Change 2021 2020 change
Contracts (units in
thousands)
Issued 677 662 2 % 2,296 1,872 23 %
Average in force 10,063 9,526 6 % 9,866 9,465 4 %
(Dollars in millions)
Voluntary protection
contract revenues
and insurance earned
premiums $ 255 $ 241 6 % $ 758 $ 714 6 %
Investment and other
income, net 64 158 (59 )% 199 369 (46 )%
Revenues from voluntary
protection operations 319 399 (20 )% 957 1,083 (12 )%
Expenses:
Voluntary protection
contract expenses
and insurance losses 96 98 (2 )% 303 265 14 %
Operating and
administrative expenses 101 86 17 % 291 270 8 %
Total expenses 197 184 7 % 594 535 11 %
Income before income taxes 122 215 (43 )% 363 548 (34 )%
Provision for income taxes 29 52 (44 )% 87 132 (34 )%
Net income from voluntary
protection operations $ 93 $ 163 (43 )% $ 276 $ 416 (34 )%
Our voluntary protection operations reported net income of $276 million and $93
million for the first nine months and third quarter of fiscal 2022,
respectively, compared to $416 million and $163 million for the same periods in
fiscal 2021. The decrease in net income from voluntary protection operations for
the first nine months of fiscal 2022, compared to the same period in fiscal
2021, was primarily due to a $170 million decrease in investment and other
income, net, and a $38 million increase in voluntary protection contract
expenses and insurance losses, partially offset by a $45 million decrease in
provision for income taxes, and a $44 million increase in voluntary protection
contract revenues and insurance earned premiums. The decrease in net income from
voluntary protection operations for the third quarter of fiscal 2022, compared
to same period in fiscal 2021, was primarily due to a $94 million decrease in
investment and other income, net, and a $15 million increase in operating and
administrative expenses, partially offset by a $23 million decrease in provision
for income taxes, and a $14 million increase in voluntary protection contract
revenues and insurance earned premiums.
Contracts issued increased 23 percent and 2 percent in the first nine months and
third quarter of fiscal 2022, compared to the same periods in fiscal 2021. The
higher contract issuances for the first nine months of fiscal 2022, compared to
the same period in fiscal 2021, was mainly due to the continued growth of our
private label services and our issuances were negatively impacted in fiscal year
2021 by the decline in economic conditions caused by the COVID-19 pandemic and
the restrictions designed to slow the spread of COVID-19. The average number of
contracts in force increased 4 percent and 6 percent for the first nine months
and third quarter of fiscal 2022, respectively, compared to the same periods in
fiscal 2021, due to net growth in the voluntary protection portfolio, most
notably in prepaid maintenance, guaranteed auto protection, and vehicle services
contracts.
Revenue from Voluntary Protection Operations
Our voluntary protection operations reported voluntary protection contract revenues and insurance earned premiums of$758 million and$255 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$714 million and$241 million for the same periods in fiscal 2021. Voluntary protection contract revenues and insurance earned premiums represent revenues from in force contracts and are affected by issuances as well as the level, age, and mix of in force contracts. Voluntary protection contract revenues and insurance earned premiums are recognized over the term of the contracts in relation to the timing and level of anticipated claims. The increase in voluntary protection contract revenues and insurance earned premiums for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to an increase in our average in force contracts resulting from net growth in the voluntary protection portfolio. 47 --------------------------------------------------------------------------------
Investment and Other Income, Net
Our voluntary protection operations reported investment and other income, net of$199 million for the first nine months of fiscal 2022, compared to$369 million for the same period in fiscal 2021. Our voluntary protection operations reported investment and other income, net of$64 million for the third quarter of fiscal 2022, compared to investment and other income, net of$158 million for the same period in fiscal 2021. Investment and other income, net, consists primarily of dividend and interest income, realized gains and losses on investments in marketable securities, changes in fair value from equity and available-for-sale debt securities for which the fair value option was elected, and credit loss expense on available-for-sale debt securities, if any. The decrease in investment and other income, net for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to lower gains from changes in fair value on our equity investments and from sales of fixed income securities, as well as lower dividend income. The decrease in investment and other income, net for the third quarter of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to lower dividend income and lower gains from changes in fair value on our equity investments.
Voluntary Protection Contract Expenses and Insurance Losses
Our voluntary protection operations reported voluntary protection contract expenses and insurance losses of$303 million and$96 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$265 million and$98 million for the same periods in fiscal 2021. Voluntary protection contract expenses and insurance losses incurred are a function of the amount of covered risks, the frequency and severity of claims associated with in force contracts and the level of risk retained by our voluntary protection operations. Voluntary protection contract expenses and insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. The increase in voluntary protection contract expenses and insurance losses for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to an increase in frequency of claims in our prepaid maintenance contracts, vehicle service contracts and tire and wheel contracts. Our voluntary protection contract expenses and insurance losses in fiscal 2021 were impacted by lower claims as a result of changes in consumer driving patterns caused by the COVID-19 pandemic, including restrictions and other changes in behavior.
Operating and Administrative Expenses
Our voluntary protection operations operating and administrative expenses increased to$291 million and$101 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$270 million and$86 million for the same periods in fiscal 2021. The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily attributable to higher acquisition and other product expenses, higher dealer back-end program expenses, and overhead expenses. Insurance dealer back-end program expenses are incentives or expense reduction programs we offer to dealers based on certain performance criteria. 48
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Provision for Income Taxes We recorded a provision for income taxes of$697 million and$233 million for the first nine months and third quarter of fiscal 2022, respectively, compared to$546 million and$215 million for the same periods in fiscal 2021. Our effective tax rate was 23 percent and 24 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to 24 percent for each of the same periods in fiscal 2021. The increase in the provision for income taxes for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to the increase in income before income taxes. The lower effective tax rate for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily attributable to the tax benefit from the federal tax credits recognized in fiscal 2022 as well as the enacted state tax law changes that resulted in higher state tax expense in fiscal 2021. 49
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FINANCIAL CONDITION
Vehicle Financing Volume and Net Earning Assets
The composition of our vehicle contract volume and market share is summarized
below:
Three months ended Nine months ended
December 31, Percentage December 31, Percentage
(units in thousands): 2021 2020 change 2021 2020 Change
Vehicle financing
volume 1:
New retail contracts 158 198 (20 )% 523 570 (8 )%
Used retail contracts 106 114 (7 )% 355 354 - %
Lease contracts 72 142 (49 )% 349 355 (2 )%
Total 336 454 (26 )% 1,227 1,279 (4 )%
TMNA subvened vehicle financing volume 2:
New retail contracts 63 68 (7 )% 174 234 (26 )%
Used retail contracts 8 8 - % 21 50 (58 )%
Lease contracts 42 107 (61 )% 207 257 (19 )%
Total 113 183 (38 )% 402 541 (26 )%
Market share of TMNA
sales 3: 54.3 % 59.1 % 55.1 % 61.5 %
1 Total financing volume was comprised of approximately 64 percent
percent Lexus, 14 percent Mazda, and 7 percent non-
first nine months of fiscal 2022. Total financing volume was comprised of
approximately 67 percent
percent non-
financing volume was comprised of approximately 66 percent
Lexus, 13 percent Mazda, and 6 percent non-
nine months of fiscal 2021. Total financing volume was comprised of
approximately 67 percent
percent non-
2 TMNA subvened volume units are included in the total vehicle financing. Units
exclude third-party subvened units.
3 Represents the percentage of total domestic TMNA sales of new
vehicles financed by us, excluding sales under dealer rental car and commercial
fleet programs, sales of a privateToyota distributor and private label vehicles financed. Vehicle Financing Volume The volume of our retail and lease contracts, which are acquired primarily fromToyota , Lexus, and private label dealers, is dependent upon TMNA and private label sales volume, the level of TMNA, private label, and third-party sponsored subvention and other incentive programs, as well as TMCC competitive rate and other incentive programs. Our financing volume decreased 4 percent and 26 percent for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, primarily due to lower new vehicles inventory levels. The economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles. This has led to lower levels of incentives and subvention on new and used retail contracts and lease contracts, which has resulted in increased competition from other financial institutions. Our market share of TMNA sales decreased approximately 6 percentage points and approximately 5 percentage points for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, due to lower levels of incentives and subvention on new and used retail and lease contracts and increased competition from other financial institutions. 50 --------------------------------------------------------------------------------
The composition of our net earning assets is summarized below:
December 31, March 31, Percentage
(Dollars in millions) 2021 2021 change
Net Earning Assets
Finance receivables, net
Retail finance receivables, net $ 70,716 $ 65,653 8 %
Dealer financing, net 1 10,209 13,539 (25 )%
Total finance receivables, net 80,925 79,192 2 %
Investments in operating leases, net 36,836 37,091 (1 )%
Net earning assets $ 117,761 $ 116,283 1 %
Dealer Financing
(Number of dealers serviced)
Toyota, Lexus, and private label dealers1 1,015 1,002 1 %
Dealers outside of the Toyota /Lexus/private
label dealer network 411 395 4 %
Total number of dealers receiving wholesale
financing 1,426 1,397 2 %
Dealer inventory outstanding (units in
thousands) 65 185 (65 )%
1 Includes wholesale and other credit arrangements in which we participate as
part of a syndicate of lenders.
Retail Contract Volume and Earning Assets
Our new retail contract volume decreased 8 percent and 20 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, primarily due to a decrease in the availability of new vehicles and lower levels of incentives and subvention on new contracts. Economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles. Our used retail contracts remained relatively unchanged for the first nine months of fiscal 2022, compared to the same period in fiscal 2021. Our used retail contracts decreased by 7 percent for the third quarter of fiscal 2022, compared to same period in fiscal 2021, due to increased competition in the used vehicle marketplace caused by the reduction in new vehicle inventory levels. Our retail finance receivables, net increased 8 percent atDecember 31, 2021 as compared toMarch 31, 2021 due to higher retail contracts outstanding and higher average amount financed.
Lease Contract Volume and Earning Assets
Our lease contract volume decreased 2 percent and 49 percent for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, primarily due to the decrease in the availability of new vehicles and lower levels of incentive and subvention programs. Our investments in operating leases, net, remained relatively unchanged atDecember 31, 2021 , as compared toMarch 31, 2021 due to lower average operating lease units outstanding, offset by higher vehicle values.
Dealer Financing and Earning Assets
Dealer financing, net decreased 25 percent at
financing. Economic conditions caused by the COVID-19 pandemic, including
production halts and supply shortages affecting the automotive industry and
additional delays affecting the supply chain and logistics networks, have
resulted in a temporary decrease in dealer new vehicle inventory levels.
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Residual Value Risk The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, current economic conditions and outlook, projected end-of-term market values, and the resulting impact on depreciation expense and lease return rates. Higher average operating lease units outstanding and the resulting increase in maturities, a higher supply of used vehicles, as well as deterioration in actual and expected used vehicle values forToyota , Lexus, and private label vehicles could unfavorably impact return rates, residual values, and depreciation expense. On a quarterly basis, we review the estimated end-of-term market values of leased vehicles to assess the appropriateness of our carrying values. To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value. For investments in operating leases, adjustments are made on a straight-line basis over the remaining terms of the lease contracts and are included in Depreciation on operating leases in our Consolidated Statements of Income as a change in accounting estimate.
Depreciation on Operating Leases
Depreciation on operating leases and average operating lease units outstanding
are as follows:
Three months ended Nine months ended
December 31, Percentage December 31, Percentage
2021 2020 change 2021 2020 change
Depreciation on
operating leases
(dollars in
millions) $ 1,460 $ 1,450 1 % $ 4,400 $ 4,484 (2 )%
Average operating
lease units
outstanding
(in thousands) 1,308 1,326 (1 )% 1,330 1,337 (1 )%
Depreciation expense on operating leases decreased 2 percent for the first nine
months of fiscal 2022, as compared to the same period in fiscal 2021, primarily
due to lower residual value losses as a result of continued historically high
levels of average used vehicle values and lower average operating lease units
outstanding. Depreciation expense on operating leases remained relatively
consistent for the third quarter of fiscal 2022, as compared to the same period
in fiscal 2021. The economic conditions caused by the COVID-19 pandemic,
including production halts and supply shortages affecting the automotive
industry and additional delays affecting the supply chain and logistics
networks, have resulted in a decrease in the availability of new vehicles, which
has led to higher off-lease vehicle purchases by dealers due to increased used
vehicle values and decreased new vehicle inventory supply.
52
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Origination, Credit Loss, and Delinquency Experience
Our credit loss experience may be affected by a number of factors including the
economic environment, our purchasing, servicing and collections practices, used
vehicle market conditions and subvention. Changes in the economy that impact the
consumer such as increasing interest rates, and a rise in the unemployment rate
as well as higher debt balances, coupled with deterioration in actual and
expected used vehicle values, could increase our credit losses. In addition, a
decline in the effectiveness of our collection practices could also increase our
credit losses. We continuously evaluate and refine our purchasing practices and
collection efforts to minimize risk. In addition, subvention contributes to our
overall portfolio quality, as subvened contracts typically have higher credit
scores than non-subvened contracts.
The following table provides information related to our origination experience:
December 31, March 31, December 31,
2021 2021 2020
Average consumer portfolio
origination FICO score 742 744 744
Average retail loan origination term
(months) 1 69 68 68
1 Retail loan origination greater than or equal to 78 months was 9% as of
While we have included the average origination FICO score to illustrate
origination trends, we also use a proprietary credit scoring system to evaluate
an applicant's risk profile. Refer to Part I. Item 1. Business "Finance
Operations" in our fiscal 2021 Form 10-K for further discussion of the
proprietary manner in which we evaluate risk.
The following table provides information related to our consumer finance
receivables and investment in operating leases:
December 31, March 31, December 31,
2021 2021 2020
Net charge-offs as a percentage of
average
finance receivables 1 0.18 % 0.29 % 0.32 %
Default frequency as a percentage of
outstanding
finance receivables contracts 1 0.71 % 0.90 % 0.86 %
Average finance receivables loss
severity per unit 2 $ 8,598 $ 10,035
Aggregate balances for accounts 60 or more days past due as a percentage of earning assets 3, 4 Finance receivables 0.51 % 0.27 % 0.38 % Operating leases 0.28 % 0.20 % 0.30 %
1 The ratio for net charge-offs and the ratio for default frequency have been
annualized using nine months results for the periods ended
and 2020. Net charge-off includes the write-offs of accounts deemed to be
uncollectable and accounts greater than 120 days past due.
2 Average loss per unit upon disposition of repossessed vehicles or charge-off
prior to repossession.
3 Substantially all retail receivables do not involve recourse to the dealer in
the event of customer default.
4 Includes accounts in bankruptcy and excludes accounts for which vehicles have
been repossessed.
Management considers historical credit loss information when assessing the allowance for credit losses. Historical credit losses are primarily driven by two factors: default frequency and loss severity. Our net charge-offs as a percentage of average finance receivables for the first nine months of fiscal 2022 decreased to 0.18 percent atDecember 31, 2021 from 0.32 percent atDecember 31, 2020 . Our average finance receivables loss severity per unit for the first nine months of fiscal 2022 decreased to$8,598 from$10,138 in the first nine months of fiscal 2021. Our default frequency as a percentage of outstanding finance receivable contracts decreased to 0.71 percent for the first nine months of fiscal 2022, compared to 0.86 percent in the same period in fiscal 2021. The changes in our net charge-offs, loss severity per unit, and default frequency were primarily due to higher average used vehicle values, which reduced net charge-offs, loss per unit, and default frequency. Our aggregate balances for accounts 60 or more days past due as a percentage of finance receivables was 0.51 percent atDecember 31, 2021 , compared to 0.38 percent atDecember 31, 2020 , and 0.27 percent atMarch 31, 2021 . Our aggregate balances for accounts 60 or more days past due as a percentage of operating leases was 0.28 percent atDecember 31, 2021 , compared to 0.30 percent atDecember 31, 2020 , and 0.20 percent atMarch 31, 2021 . Along with our typical seasonal pattern for delinquency, the finance receivables delinquency rate in fiscal 2021 was positively impacted by the retail payment extension programs offered to our customers and dealers impacted by COVID-19, as well as influenced by government 53
-------------------------------------------------------------------------------- stimulus and other external programs in fiscal 2021, which are no longer available. In addition, for a portion of fiscal 2021, as a result of a decline in economic conditions caused by the COVID-19 pandemic, there were government restrictions on repossession activities in certain states for which we have a high percentage of lease contracts which had a negative impact on our operating lease payments delinquency. If the negative economic conditions caused by the COVID-19 pandemic continue, delinquencies and charge-offs could increase.
Allowance for Credit Losses
We maintain an allowance for credit losses which is measured by an impairment
model that reflects lifetime expected losses.
The allowance for credit losses for our retail consumer portfolio is measured on a collective basis when loans have similar risk characteristics such as loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type, contract term, and other relevant factors. We use statistical models to estimate lifetime expected credit losses of our retail loan portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default models are developed from internal risk scoring models which consider variables such as delinquency status, historical default frequency, and other credit quality indicators. Other credit quality indicators include loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type (new or used, Lexus,Toyota , or private label), and contract term. Loss given default models forecast the extent of losses given that a default has occurred and consider variables such as collateral, trends in recoveries, historical loss severity, and other contract structure variables. Exposure at default represents the expected outstanding principal balance, including the effects of expected prepayment when applicable. The lifetime expected credit losses incorporate the probability-weighted forward-looking macroeconomic forecasts for baseline, favorable, and adverse scenarios. The loan lifetime is regarded by management as the reasonable and supportable period. We use macroeconomic forecasts from a third party and update such forecasts quarterly. On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios and their weighting to ensure they reflect the risk of the portfolio. For the allowance for credit losses for our dealer portfolio, an allowance for credit losses is established for both outstanding dealer finance receivables and certain unfunded off-balance sheet lending commitments. The allowance for credit losses is measured on a collective basis when loans have similar risk characteristics such as dealer group internal risk rating and loan-to-value ratios. We measure lifetime expected credit losses of our dealer products portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default is primarily established based on internal risk assessments. The probability of default model also considers qualitative factors related to macroeconomic outlooks. Loss given default is established based on the nature and market value of the collateral, loan-to-value ratios and other credit quality indicators. Exposure at default represents the expected outstanding principal balance. The lifetime of the loan or lending commitment is regarded by management as the reasonable and supportable period. On an ongoing basis, we review our models, including macroeconomic outlooks, to ensure they reflect the risk of the portfolio.
If management does not believe the models reflect lifetime expected credit
losses, a qualitative adjustment is made to reflect management judgment
regarding observable changes in recent or expected economic trends and
conditions, portfolio composition, and other relevant factors.
The following table provides information related to our allowance for credit
losses for finance receivables and certain off-balance sheet lending
commitments:
Three months ended Nine months ended
December 31, December 31,
2021 2020 2021 2020
Allowance for credit losses at beginning
of period $ 1,224 $ 1,174 $ 1,215 $ 727
Adoption of ASU 2016-13 1 - - - 292
Charge-offs (64 ) (113 ) (152 ) (228 )
Recoveries 14 20 46 42
Provision for credit losses 45 118 110 366
Allowance for credit losses at end of
period 2 $ 1,219 $ 1,199 $
1,219
1 Cumulative pre-tax adjustments recorded to retained earnings as of
2020.
2 Ending balance as of
losses related to off-balance-sheet commitments of
respectively, which is included in Other liabilities on the Consolidated
Balance Sheet.
54
-------------------------------------------------------------------------------- Our allowance for credit losses increased by$20 million from$1,199 million atDecember 31, 2020 to$1,219 million atDecember 31, 2021 . The increase in the allowance for credit losses was primarily due to the increase in size of our retail loan portfolio and an increase in delinquencies, partially offset by lower expected credit losses in response to improvements in the macroeconomic forecast as well as a decrease in size of our dealer products portfolio. Future changes in the economy that impact the consumer and consumer confidence such as increasing interest rates and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in further increases to our allowance for credit losses. In addition, a decline in the effectiveness of our collection practices could also increase our allowance for credit losses. 55 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due. Our liquidity strategy is to ensure that we maintain the ability to fund assets and repay liabilities in a timely and cost-effective manner, even in adverse market conditions. Our strategy includes raising funds via the global capital markets and through loans, credit facilities, and other transactions as well as generating liquidity from our earning assets. This strategy has led us to develop a diversified borrowing base that is distributed across a variety of markets, geographies, investors and financing structures. Liquidity management involves forecasting and maintaining sufficient capacity to meet our cash needs, including unanticipated events. To ensure adequate liquidity through a full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on developing and maintaining direct relationships with commercial paper investors and wholesale market funding providers and maintaining the ability to sell certain assets when and if conditions warrant. We develop and maintain contingency funding plans and regularly evaluate our liquidity position under various operating circumstances, allowing us to assess how we will be able to operate through a period of stress when access to normal sources of capital is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, and outline actions and procedures for effectively managing through the problem period. In addition, we monitor the ratings and credit exposure of the lenders that participate in our credit facilities to ascertain any issues that may arise with potential draws on these facilities if that contingency becomes warranted. We maintain broad access to a variety of domestic and global markets and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors. We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term, highly liquid and investment grade money market instruments as well as certain available-for-sale debt securities, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources. We maintained excess funds ranging from$7.5 billion to$11.4 billion with an average balance of$9.2 billion during the quarter endedDecember 31, 2021 . The amount of excess funds we hold may fluctuate, depending on market conditions and other factors. We also have access to liquidity under the$5.0 billion credit facility withToyota Motor Sales U.S.A., Inc. ("TMS"), which as ofDecember 31, 2021 was not drawn upon and had no outstanding balance as further described in Note 7 - Debt and Credit Facilities of the Notes to the Consolidated Financial Statements. We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity. Credit support is provided to us by our indirect parentToyota Financial Services Corporation ("TFSC"), and, in turn to TFSC by TMC. Taken together, these credit support agreements provide an additional source of liquidity to us, although we do not rely upon such credit support in our liquidity planning and capital and risk management. The credit support agreements are not a guarantee by TMC or TFSC of any securities or obligations of TFSC or TMCC, respectively. The fees paid pursuant to these agreements are disclosed in Note 11 - Related Party Transactions of the Notes to Consolidated Financial Statements. TMC's obligations under its credit support agreement with TFSC rank pari passu with TMC's senior unsecured debt obligations. Refer to Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations "Liquidity and Capital Resources" in our fiscal 2021 Form 10-K for further discussion. We routinely monitor global financial conditions and our financial exposure to our global counterparties, particularly in those countries experiencing significant economic, fiscal or political strain, and the corresponding likelihood of default. As ofDecember 31, 2021 , our exposure to foreign sovereign and non-sovereign counterparties was not significant. Refer to the "Liquidity and Capital Resources - Credit Facilities and Letters of Credit" section and Part I, Item 1A. Risk Factors - "The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, results of operations or financial condition" in our fiscal 2021 Form 10-K for further discussion. 56
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Funding
The following table summarizes the components of our outstanding debt which
includes unamortized premiums, discounts, debt issuance costs and the effects of
foreign currency translation adjustments:
December 31, 2021 March 31, 2021
Weighted average Weighted average
Carrying contractual Carrying contractual
(Dollars in millions) Face value value interest rates
Face value value interest rates Unsecured notes and loans payable Commercial paper$ 17,001 $ 16,992 0.17 %$ 17,027 $ 17,021 0.20 %
("MTN") program 45,387 45,245 1.45 % 44,294 44,149 1.64 %
Euro medium term note
("EMTN") program 14,076 13,991 1.54 % 16,262 16,173 1.57 %
Other debt 5,829 5,826 1.06 % 8,176 8,170 1.33 %
Total Unsecured notes
and loans
payable 82,293 82,054 1.17 % 85,759 85,513 1.31 %
Secured notes and loans
payable 28,114 28,068 0.91 % 24,256 24,212 1.29 %
Total debt $ 110,407 $ 110,122 1.10 % $ 110,015 $ 109,725 1.31 %
Unsecured notes and loans payable
The following table summarizes the significant activities by program of our
Unsecured notes and loans payable:
Total
Unsecured
notes and
Commercial loans
(Dollars in millions) paper 1 MTNs EMTNs Other payable
Balance at March 31, 2021 $ 17,027 $ 44,294 $ 16,262 $ 8,176 $ 85,759
Issuances - 11,605 2,140 1,867 15,612
Maturities and terminations (26 ) (10,512 ) (4,060 ) (4,210 ) (18,808 )
Non-cash changes in foreign
currency rates - -
(266 ) (4 ) (270 )
Balance at
1 Changes in Commercial paper are shown net due to its short duration.
Commercial paper
Short-term funding needs are met through the issuance of commercial paper in theU.S. Commercial paper outstanding under our commercial paper programs ranged from approximately$16.7 billion to$17.7 billion during the quarter endedDecember 31, 2021 , with an average outstanding balance of$17.1 billion . Our commercial paper programs are supported by the credit facilities discussed under the heading "Credit Facilities and Letters of Credit." We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity. MTN program We maintain a shelf registration statement with theSecurities and Exchange Commission ("SEC") to provide for the issuance of debt securities in theU.S. capital markets to retail and institutional investors. We currently qualify as a well-known seasoned issuer underSEC rules, which allows us to issue under our registration statement an unlimited amount of debt securities during the three-year period endingJanuary 2024 . Debt securities issued under theU.S. shelf registration statement are issued pursuant to the terms of an indenture which requires TMCC to comply with certain covenants, including negative pledge and cross-default provisions. We are currently in compliance with these covenants. 57
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EMTN program Our EMTN program, shared with our affiliatesToyota Motor Finance (Netherlands) B.V .,Toyota Credit Canada Inc. andToyota Finance Australia Limited (TMCC and such affiliates, the "EMTN Issuers"), provides for the issuance of debt securities in the international capital markets. InSeptember 2021 , the EMTN Issuers renewed the EMTN program for a one-year period. The maximum aggregate principal amount authorized under the EMTN Program to be outstanding at any time is €60.0 billion or the equivalent in other currencies, of which €27.2 billion was available for issuance atDecember 31, 2021 . The authorized amount is shared among all EMTN Issuers. The authorized aggregate principal amount under the EMTN program may be increased from time to time. Debt securities issued under the EMTN program are issued pursuant to the terms of an agency agreement. Certain debt securities issued under the EMTN program are subject to negative pledge provisions. We are currently in compliance with these covenants. We may issue other debt securities through the global capital markets or enter into other unsecured financing arrangements, including those in which we agree to use the proceeds solely to acquire retail or lease contracts financing newToyota and Lexus vehicles of specified "green" models. The terms of these "green" bond transactions have been consistent with the terms of other similar transactions except that the proceeds we receive are included in Restricted cash and cash equivalents on our Consolidated Balance Sheets, when applicable.
Other debt
TMCC has entered into term loan agreements with various banks. These term loan agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions. We may borrow from affiliates on terms based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets and are therefore excluded from Debt amounts.
Secured Notes and Loans Payable
Asset-backed securitization of our earning asset portfolio provides us with an
alternative source of funding. We regularly execute public or private
securitization transactions.
The following table summarizes the significant activities of our Secured notes
and loans payable:
Secured
notes and
loans
(Dollars in millions) payable
Balance at March 31, 2021 $ 24,256
Issuances 14,304
Maturities and terminations (10,446 )
Balance at December 31, 2021 $ 28,114
We securitize finance receivables and beneficial interests in investments in
operating leases ("Securitized Assets") using a variety of structures. Our
securitization transactions involve the transfer of Securitized Assets to
bankruptcy-remote special purpose entities. These bankruptcy-remote entities are
used to ensure that the Securitized Assets are isolated from the claims of
creditors of TMCC and that the cash flows from these assets are available solely
for the benefit of the investors in these asset-backed securities. Investors in
asset-backed securities do not have recourse to our other assets, and neither
TMCC nor our affiliates guarantee these obligations. We are not required to
repurchase or make reallocation payments with respect to the Securitized Assets
that become delinquent or default after securitization. As seller and servicer
of the Securitized Assets, we are required to repurchase or make a reallocation
payment with respect to the underlying assets that are subsequently discovered
not to have met specified eligibility requirements. This repurchase obligation
is customary in securitization transactions. With the exception of our revolving
asset-backed securitization program, funding obtained from our securitization
transactions is repaid as the underlying Securitized Assets amortize.
We service the Securitized Assets in accordance with our customary servicing
practices and procedures. Our servicing duties include collecting payments on
Securitized Assets and submitting them to a trustee for distribution to security
holders and other interest holders. We prepare monthly servicer certificates on
the performance of the Securitized Assets, including collections, investor
distributions, delinquencies, and credit losses. We also perform administrative
services for the special purpose entities.
58
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Our use of special purpose entities in securitizations is consistent with
conventional practice in the securitization market. None of our officers,
directors, or employees hold any equity interests or receive any direct or
indirect compensation from our special purpose entities. These entities do not
own our stock or the stock of any of our affiliates. Each special purpose entity
has a limited purpose and generally is permitted only to purchase assets, issue
asset-backed securities, and make payments to the security holders, other
interest holders and certain service providers as required under the terms of
the transactions.
Our securitizations are structured to provide credit enhancement to reduce the
risk of loss to security holders and other interest holders in the asset-backed
securities. Credit enhancement may include some or all of the following:
• Overcollateralization: The principal of the Securitized Assets that exceeds
the principal amount of the related secured debt.
• Excess spread: The expected interest collections on the Securitized Assets
that exceed the expected fees and expenses of the special purpose entity,
including the interest payable on the debt, net of swap settlements, if any.
• Cash reserve funds: A portion of the proceeds from the issuance of
asset-backed securities may be held by the securitization trust in a
segregated reserve fund and may be used to pay principal and interest to
security holders and other interest holders if collections on the underlying
receivables are insufficient.
• Yield supplement arrangements: Additional overcollateralization may be
provided to supplement the future contractual interest payments from
securitized receivables with relatively low contractual interest rates.
• Subordinated notes: The subordination of principal and interest payments on
subordinated notes may provide additional credit enhancement to holders of
senior notes.
In addition to the credit enhancement described above, we may enter into interest rate swaps with our special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured notes and loans payable. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets. Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets. We also recognize interest expense on the secured notes and loans payable issued by the special purpose entities and maintain an allowance for credit losses on the Securitized Assets to cover estimated lifetime expected credit losses using a methodology consistent with that used for our non-securitized asset portfolio. The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements. We periodically enter into term securitization transactions whereby we agree to use the proceeds solely to acquire retail and lease contracts financing newToyota and Lexus vehicles of certain specified "green" models. The terms of these "green" securitization transactions have been consistent with the terms of our other similar transactions except that the proceeds we receive are included in Restricted cash and cash equivalents on our Consolidated Balance Sheets, when applicable. Our secured notes also include a revolving asset-backed securitization program backed by a revolving pool of finance receivables and cash collateral. Cash flows from these receivables during the revolving period in excess of what is needed to pay certain expenses of the securitization trust and contractual interest payments on the related secured notes may be used to purchase additional receivables, provided that certain conditions are met following the purchase. The secured notes feature a scheduled revolving period, with the ability to repay the secured notes in full, after which an amortization period begins. The revolving period may also end with the amortization period beginning upon the occurrence of certain events that include certain segregated account balances falling below their required levels, credit losses or delinquencies on the pool of assets supporting the secured notes exceeding specified levels, the adjusted pool balance falling to less than 50% of the initial principal amount of the secured notes, or interest not being paid on the secured notes.
Public Securitization
We maintain a shelf registration statement with theSEC to provide for the issuance of securities backed by Securitized Assets in theU.S. capital markets during the three-year period endingDecember 2021 . We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain. None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity. As ofDecember 31, 2021 andMarch 31, 2021 , we did not have any outstanding lease securitization transactions registered with theSEC . 59
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Credit Facilities and Letters of Credit
For additional liquidity purposes, we maintain credit facilities, which may be
used for general corporate purposes, as described below:
364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit
Agreement
TMCC,Toyota Credit de Puerto Rico Corp. ("TCPR"), and otherToyota affiliates are party to a$5.0 billion 364-day syndicated bank credit facility, a$5.0 billion three-year syndicated bank credit facility, and a$5.0 billion five-year syndicated bank credit facility, expiring in fiscal 2023, 2025 and 2027, respectively. The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements were not drawn upon and had no outstanding balances as ofDecember 31, 2021 andMarch 31, 2021 . We are currently in compliance with the covenants and conditions of the credit agreements described above.
Committed Revolving Asset-backed Facility
We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2023. Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of$7.0 billion backed by eligible retail finance receivables transferred by us to a special-purpose entity acting as borrower. As ofDecember 31, 2021 ,$3.7 billion of this facility was utilized.
Other Unsecured Credit Agreements
TMCC is party to additional unsecured credit facilities with various banks. As ofDecember 31, 2021 , TMCC had committed bank credit facilities totaling$4.6 billion of which$350 million ,$2.2 billion ,$300 million , and$1.7 billion mature in fiscal 2022, 2023, 2024, and 2025 respectively. These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were not drawn upon and had no outstanding balances as ofDecember 31, 2021 andMarch 31, 2021 . We are currently in compliance with the covenants and conditions of the credit agreements described above.
TMCC is party to a
expiring in fiscal 2025. This credit facility was not drawn upon and had no
outstanding balance as of
From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.
Credit Ratings
The cost and availability of unsecured financing is influenced by credit
ratings, which are intended to be an indicator of the creditworthiness of a
particular company, security, or obligation. Lower ratings generally result in
higher borrowing costs as well as reduced access to capital markets. Credit
ratings are not recommendations to buy, sell, or hold securities, and are
subject to revision or withdrawal at any time by the assigning credit rating
organization. Each credit rating organization may have different criteria for
evaluating risk, and therefore ratings should be evaluated independently for
each organization. Our credit ratings depend in part on the existence of the
credit support agreements of TFSC and TMC. Refer to "Part I, Item 1A. Risk
Factors - Our borrowing costs and access to the unsecured debt capital markets
depend significantly on the credit ratings of TMCC and its parent companies and
our credit support arrangements" in our fiscal 2021 Form 10-K.
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DERIVATIVE INSTRUMENTS Risk Management Strategy Our liabilities consist mainly of fixed and variable rate debt, denominated inU.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily ofU.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.
Accounting for Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle asset and liability positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of derivatives are recorded in Interest expense in our Consolidated Statements of Income. The derivative instruments are included as a component of Other assets or Other liabilities on our Consolidated Balance Sheets. Accounting guidance permits the net presentation on our Consolidated Balance Sheets of derivative receivables and derivative payables with the same counterparty and the related cash collateral when a legally enforceable master netting agreement exists, or when the derivative receivables and derivative payables meet all the conditions for the right of setoff to exist. When we meet this condition, we elect to present such balances on a net basis. OurInternational Swaps and Derivatives Association ("ISDA") Master Agreements are our master netting agreements which permit multiple transactions to be cancelled and settled with a single net balance paid to either party for our OTC derivatives. The master netting agreements also contain reciprocal collateral agreements which require the transfer of cash collateral to the party in a net asset position across all transactions. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement. Although we have daily valuation and collateral exchange arrangements with all of our counterparties, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives. We would not be required to post additional collateral to the counterparties with whom we were in a net liability position atDecember 31, 2021 , if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties. In addition, as our collateral agreements include legal right of offset provisions, collateral amounts are netted against derivative assets or derivative liabilities. For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments and accounted for with corresponding derivative positions as one unit of account as opposed to collateral. Initial margin payments are separately recorded in Other Assets on our Consolidated Balance Sheets. We perform valuation and margin exchange on a daily basis. Similar to the OTC swaps, there may be a delay of up to one day between the exchange of margin payments and the valuation of our derivatives. We categorize derivatives as those designated for hedge accounting ("hedge accounting derivatives") and those that are not designated for hedge accounting ("non-hedge accounting derivatives"). At the inception of a derivative contract, we may elect to designate a derivative as a hedge accounting derivative. We had no hedge accounting derivatives as ofDecember 31, 2021 andMarch 31, 2021 , respectively.
Refer to Note 6 - Derivatives, Hedging Activities and Interest Expense of the
Notes to Consolidated Financial Statements.
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Derivative Assets and Liabilities
The following table summarizes our derivative assets and liabilities, which are
included in Other assets and Other liabilities on our Consolidated Balance
Sheets:
December 31, March 31,
(Dollars in millions) 2021 2021
Gross derivatives assets, net of credit valuation
adjustment $ 1,083 $ 1,356
Less: Counterparty netting (640 ) (840 )
Less: Collateral held (380 ) (462 )
Derivative assets, net $ 63 $ 54
Gross derivative liabilities, net of credit
valuation adjustment $ 938 $ 1,385
Less: Counterparty netting (640 ) (840 )
Less: Collateral posted (298 ) (544 )
Derivative liabilities, net $ - $ 1
Collateral represents cash received or deposited under reciprocal arrangements
that we have entered into with our derivative counterparties. As of December 31,
2021 and March 31, 2021 , we held excess collateral of $1 million and $29
million , respectively, which we did not use to offset derivative assets. As of
December 31, 2021 and March 31, 2021 , we posted initial margin and excess
collateral of $121 million and $10 million , respectively, which we did not use
to offset derivative liabilities.
LIBOR TRANSITION
InJuly 2017 , theUnited Kingdom Financial Conduct Authority ("FCA"), which regulates the London Inter-bank Offered Rate ("LIBOR"), announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. InNovember 2020 ,ICE Benchmark Administration , the administrator of LIBOR, announced its intention to continue publication of overnight and one-, three-, six- and 12- monthU.S. dollar LIBOR rates throughJune 30, 2023 . However,the United States Federal Reserve and other regulatory agencies issued guidance encouraging banks to cease entering into new contracts that useU.S. dollar LIBOR as a reference rate as soon as practicable and in any event byDecember 31, 2021 . OnMarch 5, 2021 , theFCA announced that certain LIBOR rates will either cease to be provided by any administrator or no longer be representative immediately afterDecember 31, 2021 (or, in the case of overnight and one-, three-, six- and 12-monthU.S. dollar LIBOR rates, immediately afterJune 30, 2023 ). We are exposed to LIBOR-based financial instruments, including through our dealer financing activities, derivative contracts, secured and unsecured debt, and investment securities. To facilitate an orderly transition from LIBOR to alternative reference rates ("ARRs"), we have established an initiative led by senior management, with Board and committee oversight, to assess, monitor and mitigate risks associated with the expected discontinuation of LIBOR, to achieve operational readiness and engage impacted borrowers and counterparties in connection with the transition to ARRs. Our efforts under this initiative include monitoring developments and the usage of ARRs, monitoring the regulatory and financial reporting guidance, as well as reviewing and updating current legal contracts, internal systems and processes to accommodate the use of ARRs. For example, we have committed to using Secured Overnight Financing Rate ("SOFR") linked rates in connection with various borrowing arrangements and Prime in connection with various lending arrangements, and we continue to evaluate other alternatives as potential ARRs to LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized byU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. We are also continuously assessing how the expected discontinuation of LIBOR will impact accounting and financial reporting. For example, onApril 1, 2021 , we adopted ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as further discussed in Note 1 - Interim Financial Data of the Notes to Consolidated Financial Statements. Refer to Part I, Item 1A. Risk Factors - "Uncertainty about the transition away from the London Interbank Offered Rate ("LIBOR") and the adoption of alternative reference rates could adversely impact our business and results of operations" in our fiscal 2021 Form 10-K for further discussion. 62 --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
Refer to Note 1 - Interim Financial Data of the Notes to Consolidated Financial
Statements.
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
TMCC has guaranteed the payments of principal and interest with respect to the bond obligations that were issued byPutnam County, West Virginia andGibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion. Commitments A description of our lending commitments is included under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements" and Note 12 - Related Party Transactions of the Notes to Consolidated Financial Statements in our fiscal 2021 Form 10-K, as well as in Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Indemnification
Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated
Financial Statements for a description of agreements containing indemnification
provisions.
63
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