Talk about a stimulus package…
Harley-Davidson Inc. has sold $600 million worth of debt, including half to Warren Buffett’s Berkshire Hathaway Inc., a move that boosted Harley shares.
Berkshire and money manager Davis Selected Advisers LP, the largest Harley shareholder, each bought $300 million of senior unsecured notes carrying an annual rate of 15% – about twice the yield of a typical investment-grade corporate bond.
Berkshire’s involvement could boost investors’ confidence, making it easier for Harley to secure additional financing.
Berkshire doesn’t buy company debt without considering many possible outcomes, said analyst Ned Douthat with Ockham Research.
“It’s encouraging. I think they’re showing a sign of confidence, which should give others a good bit of confidence,” he said.
He added: “Warren Buffett is a big buyer of American securities now. He’s trying to bottom feed on some companies that have been beaten down the worst” on Wall Street.
The notes mature in 2014 and provide Harley with more cash at a time when many funding sources have dried up.
Harley-Davidson Financial Services, the consumer lending arm at Harley, needs about $1 billion in funding this year to continue providing new motorcycle loans to its customers. It also has a $500 million bank advance that’s due in March.
Harley’s outlook for 2009 largely depends on the ability of HDFS to get significant financing, according to industry analysts.
“It’s a big step in the right direction,” analyst Philip Gorham with Morningstar Research said about Tuesday’s announcement.
The issuance of $600 million of 5-year notes at 15% interest appears costly on the surface. But the transaction could open up other avenues of more affordable financing for Harley-Davidson Financial Services, analyst Tim Conder with Wachovia Capital Markets said in a note to clients.
The $600 million is an important part of Harley’s funding strategy, said Tom Bergmann, Harley’s chief financial officer and HDFS interim president.
In late January, the company unveiled a three-part strategy to address the recession and slumping motorcycle sales. It includes getting additional funding for HDFS, boosting consumer demand for Harley products and eliminating more than 1,100 jobs as a way to reduce costs.
The financial services unit has come under heavy strain recently amid the credit markets’ crisis. It posted an operating loss of $24.9 million in the fourth quarter while Harley-Davidson Inc. as a whole posted a nearly 60% decline in quarterly profit.
Harley-Davidson Financial Services accounted for about 15% of Harley’s operating profit of $1.4 billion in 2008.
In good years, it has been a powerful economic engine that’s helped the company sell motorcycles. But it relies on a healthy credit market for both operations and profits, and that market largely has been frozen as a result of the U.S. credit crisis and sudden slowdown in consumer spending.
“The company still faces some strong headwinds this year. We don’t see discretionary spending improving through 2009,” Gorham said.
Harley shares closed at $13.73 Tuesday, up $1.87 or nearly 16%.
The stock was up because Harley resolved part of its liquidity needs, according to analysts.
Citigroup, Deutsche Bank Securities, J.P. Morgan and Morgan Stanley were lead underwriters for the transaction.
Also Tuesday, Moody’s Investors Service downgraded the debt of Harley-Davidson Funding Corp. to A2 from A1. Moody’s said it would keep reviewing it for another possible downgrade.
Moody’s said Harley’s manufacturing operation has almost no debt and that the company’s $3.7 billion in borrowing is from financing activities. Moody’s also noted that Harley-Davidson Financial Services has $950 million in unsecured credit that matures in June.
Source-JSOline
