Feb 12 - Fitch Ratings has downgraded Harley-Davidson Inc. (NYSE: HOG) and HOG's 100% owned subsidiary, Harley-Davidson Financial Services, Inc. (HDFS) as
listed below. ...
The Rating Outlook on all the ratings is Negative. Fitch's actions affect
approximately $3.2 billion of debt at HDFS and $782 million of debt at HOG. Due
to the existence of a support agreement and demonstrated support by the parent,
HDFS's ratings are linked to those of HOG.
The rating actions are primarily related to developments at HDFS, including
a change in funding profile, which has led to increased borrowing costs,
deteriorating asset quality performance, and reduced operating performance.
The downgrades also reflect a reduced outlook for 2009 sales and margins at
HOG (the manufacturing operations) and higher cash outlays related to pension
and restructuring charges.
The Negative Outlook reflects the weak economic environment, which could
lead to further restructuring actions at HOG if volumes come under additional
pressure; cash outlays related to the company's pension plans in 2009 and 2010,
and dealer profitability.
In addition, the deteriorating economic environment will continue to
pressure consumers and could lead to negative asset quality performance beyond
current expectations at HDFS, which could affect profitability through
additional mark to market losses on loans held for sale, retained interest
impairments, and/or increased provisioning.
...
The 'A-' rating reflects HOG's brand strength, distribution network, solid
cash generation from its manufacturing operations, good manufacturing operating
margins, and expanding international presence.
...
Fitch is also concerned with HDFS's long-term alternatives
to fund originations if the capital markets environment remains status quo.
Based on HDFS's historical use of the asset backed securities market ($2.5
billion in 2007, $540 million in 2008), and lower retail origination levels in
2009, Fitch believes HDFS needs approximately $1 billion in financing in 2009
in addition to its available revolving credit facilities to replace
securitization funding used historically.
This funding would allow HDFS to maintain its historical funding volume of
retail U.S. sales at approximately 53%. The company made significant progress
toward the funding goal when HOG issued $600 million in notes last week,
although the 15% coupon will pressure margins in HDFS's operation. Fitch will
look for HDFS to continue to develop and execute contingency funding plans to
meet funding requirements for 2009 and beyond on a cost-effective basis.
If HDFS is unable to obtain all or part of the needed funding, HOG's
motorcycle sales could come under additional pressure if HOG's retail customers
are unable to find alternative financing sources.
...
Fitch believes HDFS's operating performance will continue to trend weaker
due to the economic and capital markets environment, manifesting itself in
higher provision expenses, charge-offs, and funding costs over the near- to
intermediate-term, with the potential for further retained interest impairments
and additional mark-to-market write-downs on loans held for sale. Fitch assumes
that HDFS's underlying collateral is more discretionary in nature and would
rank well below other assets in terms of priority of payment.
...
In 2008, total Harley-Davidson brand motorcycles shipments decreased 27,140
units or 8.2% to 303,479 bikes, while retail sales decreased 24,005 units or
7.1% to 313,769 units, indicating seasonally adjusted dealer inventories have
decreased. ...