CHICAGO, IL – March 2, 2011 – (Motor Sports Newswire) – Fitch Ratings has assigned a ‘BBB+’ rating to Harley-Davidson Financial Services, Inc. (HDFS) $450 million five-year medium-term note transaction. In the past HDFS has issued senior unsecured notes through Harley-Davidson Funding Corp. (HDFC), a 100% wholly owned subsidiary of Harley-Davidson Credit Corp. which itself is a 100% wholly owned subsidiary of HDFS. Management believes issuing at the HDFS level is more straightforward and is consistent with how other captive finance companies go to market. HDFS is the captive finance subsidiary of Harley-Davidson, Inc. (HOG), a manufacturer of motorcycles.
The ratings and Outlook for HDFS are linked to those of Harley-Davidson Inc. (HOG). HDFS’s ratings reflect its close operating relationship with HOG. This relationship is governed by a support agreement in favor of debt holders under which HOG must maintain HDFS’ fixed-charge coverage at 1.25 times (x) and minimum net worth of $40 million.
HDFS’ financial performance for the quarter ending Dec. 31, 2010 improved with operating income of $43.5 million in the quarter, compared to an operating loss of $7.1 million in the year-ago quarter. The improvement in year-over-year operating income is largely the result of lower provision for credit losses. For the full year 2010, operating income from financial services was $181.9 million, compared to an operating loss of $118 million in 2009.
Asset quality performance has shown good improvement. The 30-day delinquency rate for managed retail motorcycle loans at Dec. 31, 2010 decreased to 5.07% from 6.51% at Dec. 31, 2009. The improvement in delinquencies is driven by management’s emphasis on a higher percentage of prime originations, which are now at 85%, up from historical levels of 70%. Delinquencies at Dec. 31, 2010 are at their lowest year-end levels in five years. Losses on HDFS’ managed retail motorcycle loans were 2.11% for the year-ending Dec. 31, 2010 compared to 2.86% in 2009. The decrease in credit losses from 2009 was due to a lower frequency of loss and improvement in the recovery values of repossessed motorcycles. With the improvement in delinquencies and recovery values, asset quality performance has been better than expected. Improving inventory levels at dealers will improve the supply/demand dynamic, stabilizing recovery rates. Also, higher underwriting standards at HDFS have resulted in an increase in the percentage of prime customers in the retail portfolio, which has helped to improve asset quality performance.
HDFS’ access to the capital markets has improved in conjunction with the overall markets, demonstrated by the completion of a $600 million securitization in the fourth quarter of 2010. The amount of unencumbered collateral available for the unsecured debt holders continues to be a concern. The issuance of $450 million of unsecured debt will help reduce the reliance on secured debt. Fitch will look for HDFS to continue to develop and execute contingency funding plans to meet funding requirements and diversity for the future. HOG has taken steps to improve its liquidity position, which could be used at the HDFS level in a stress scenario. HOG recently repaid $297 million of high priced unsecured debt.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
- ‘Corporate Rating Methodology’ (Aug. 13, 2010);
- ‘Liquidity Considerations for Corporate Issuers’ (June 27, 2007);
- ‘Cash Flow Measures in Corporate Analysis’ (Oct. 12, 2005);
- ‘Global Financial Institutions Rating Criteria’ (Aug. 13, 2010);
- ‘Finance and Leasing Companies Criteria’ (Dec. 13, 2010);
- ‘Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships’ (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Linkages in Nonbank Financial Subsidiary Relationships
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
Cash Flow Measures in Corporate Analysis
Cindy Stoller, +1-212-908-0526
Media Relations, New York