Some concerns inre HDI
Fitch Affs Harley-Davidson & Harley-Davidson Financial Services Debt Ratings
CHICAGO--(BUSINESS WIRE)--July 29, 2002--Fitch Ratings has affirmed Harley-Davidson Inc.'s (HDI) senior unsecured debt at 'AA-' and Harley-Davidson Financial Services, Inc. (Financial) commercial paper rating of 'F1+', issued under 100% owned subsidiary, Harley-Davidson Funding Corp. In addition, Fitch has assigned an indicative senior unsecured rating of 'AA-' to Harley-Davidson Financial Services, Inc.
HDI's rating reflects its leading market position in the core heavyweight motorcycle segment (651 CC+) which is supported by a premier brand, a prudent production strategy, good distribution network, and recent product extensions which strive to penetrate newer categories. Moreover, HDI's long-running operational strength with robust cash generation is shown in its excellent liquidity and solid balance sheet overall. Also reflected in the rating is the company's conservative financial policy to maintain its large cash balances even as it continues to build on it further. Of some concern, however, is the ongoing sustainability of the double digit demand growth in heavy duty motorcycles in the US even as HDI ramps up productive capacity to fulfill this demand. Also of some concern is the underfundedness of the pension and other benefit obligations which will likely require some amount of cash injection going forward. The Rating Outlook is Stable.
For the three months and six months ended June 30, 2002, net sales of motorcycles and related products grew 16.1% and 17.7%, respectively, based on continuing strong retail demand in the U.S. where Harley derives more than 80% of its sales. Operating margin expanded to 18.3% from 17.9% and 18.5% from 17.6% for the three and six months ended June 30, 2002, reflecting a richer mix of products. Based on the continued strong operating and financial performance, cash and equivalents and marketable securities climbed from $635 million at December 31, 2001 to $727 million at June 30, 2002, even as capital expenditure spending increased with planned capacity expansion. Some nominal amounts of debt are drawn from a $42 million bank line at HDI for operating purposes.
The V-Rod line which was introduced last summer has been very well received to date. Early indications show that the V-Rod line enhances the product line-up with a new category tapping a wider set of potential customers without alienating the traditional loyal following of Harley customers.
Financial's rating reflects the parent's strong market position and balance sheet which showed $727 million in cash and marketable securities with a nominal amount of debt at June 30, 2002. In addition, the rating reflects sound asset quality and continued solid collateral values on motorcycles. Financial has a support agreement with Harley in which Harley must maintain Financial's fixed-charge coverage at 1.25 times (x) and minimum net worth of $40 million.
Financial reported second quarter operating income of $37.0 million, up from $23.1 million in the year-ago quarter. Financial's operating performance was driven primarily by strong retail loan originations and increased gain-on-sale revenue. Credit losses to average managed receivables declined to 0.76% for the three months ended March 31, 2002 from 0.94% in the comparable period in 2001. The low losses on the owned and managed portfolio are due to the resilience of the collateral values on motorcycles. Going forward, some weakness in asset quality is expected with a slow down in consumer spending pressuring consumers as well as collateral values on motorcycles. Offsetting this concern, Financial has significantly strengthened their loss reserve, which stood at 2.69% of owned receivables at March 31, 2002. Managed debt continues to be high in relation to Financial's peers. Mitigating the high managed debt, is the support that the parent could provide in a stressed scenario. Financial's funding mix is heavily weighted toward commercial paper (85% of total debt as of Dec. 31, 2001). Absent the company developing sufficient contingent sources of liquidity in relation to its sizeable exposure to short term borrowings, it remains essential for the parent to maintain robust levels of liquidity to maintain these strong rating levels.
CONTACT:
Fitch Ratings
James Jockle, 212/908-0547 (Media Relations, New York)
or
Harley-Davidson Inc.
Scott Lee, 312/606-2324
or
Chicago Harley-Davidson Financial
Peter J. Shimkus, 312/368-2063 (Chicago)
John S. Olert, 212/908-0663 (New York)
SOURCE: Fitch Ratings
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07/29/2002 17:58 EASTERN |
