Money Odds & Ends

Distressed Harley-Davidson borrows $500 million
Harley-Davidson Inc. has received $500 million in an advance loan from its lenders, according to a document filed with the U.S. Securities & Exchange Commission late last week.

The Milwaukee-based motorcycle manufacturer’s subsidiaries Harley-Davidson Warehouse Funding Corp. and Harley-Davidson Credit Corp. entered into a loan and servicing agreement with a group of lenders, including JPMorgan Chase Bank NA. Repayment of the loan will be due March 31, 2009.

Harley (traded on the New York Stock Exchange under the ticker symbol HOG) has $400 million in medium term notes (MTN) that matured Monday, according to a research note written by UBS analyst Robert Farley.

"On the back of this announcement it appears the unsecured debt markets may have been too difficult for Harley to access, with this arrangement providing additional time for HOG to complete a deal," Farley wrote.

The company’s Harley-Davidson Financial Services Inc. (HDFS) unit continues to carry some bad debt, Farley wrote.

"It is estimated HDFS will require $1.5 billion to continue funding its loan operations for 2009. HOG is working thru its options for securing this liquidity, but as this transaction may indicate, conditions in the unsecured debt market remain difficult, and this deal only provides $500 million thru March 31. Recent checks show that HDFS has not pared back its lending to subprime borrowers (25 to 30 percent of loan portfolio)," Farley wrote.

The loan comes on the heels of Fitch Ratings downgrading its rating outlook for Harley to "negative" in November.

"The rating action is driven by HDFS’ declining operating performance, reduced financial flexibility, and deteriorating asset quality combined with declining sales and weaker margins at HOG. The negative outlook reflects the current capital market and economic environment which could continue to pressure HDFS’ ability to originate and fund as it has historically and Fitch’s concern of further weakening asset performance. The negative outlook also reflects an expectation of lower sales and operating margins in 2009 for HOG. Minor concerns contributing to the negative outlook include the possibility of debt issuance at HOG to support HDFS and the possibility of cash outflows related to share repurchases, increased pension contributions, and additional restructuring actions next year in addition to the material amount of cash used for dividend payments. Fitch continues to view HDFS as an integral part of HOG which provides necessary financing for the purchase of HOG cycles," Fitch wrote.

"HOG’s sales and operating margins will remain challenged in 2009 as discretionary spending will continue to be pressured by the financial crises and global economic slowdown. Fitch expects that HOG will have to decrease shipments and restructure its operations in 2009 following similar actions this year. For the first nine months of 2008, total Harley-Davidson brand motorcycles shipments decreased 22,515 units or 9.0% to 226,898 bikes, while retail sales decreased 16,948 units or 6.0 percent to 267,014 units, indicating seasonally adjusted dealer inventories have decreased," Fitch wrote.

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