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Fitch Downgrades Harley-Davidson and HDFS IDRs to 'A-/F2'; Outlook Negative

^{Published on 2009-02-12 09:31:00, Last Modified on 2009-02-12 09:32:52 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded Harley-Davidson Inc. (NYSE: HOG) and HOG's 100% owned subsidiary, Harley-Davidson Financial Services, Inc. (HDFS) as listed below. All ratings have been removed from Rating Watch Negative where they were placed on Jan. 30, 2009.

Harley-Davidson Inc

--Issuer Default Rating (IDR) to 'A-' from 'A'.

Harley-Davidson Financial Services

--IDR to 'A-' from 'A';

--Short-term IDR to 'F2' from 'F1';

--Senior unsecured to 'A-' from 'A'.

Harley-Davidson Funding Corporation

--Short-term IDR to 'F2' from 'F1';

--Commercial paper to 'F2' from 'F1';

--Senior unsecured to 'A-' from 'A'.

Fitch simultaneously assigns an 'A-' rating to HOG's recent issuance of $600 million five-year senior unsecured debt.

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 Negative Outlook also takes into account execution risk on the renewal of the $500 million asset-backed commercial paper (ABCP) conduit that expires at the end of March and the $950 million 364-day credit facility that expires in July. Fitch expects that HDFS will be able to extend and increase the $500 million ABCP conduit but there is some uncertainty about cost and size. If it is unable to do so, the facility will mature March 31, 2009. Fitch believes renewal of the 364-day facility in July 2009 will be challenging for HDFS, with a high probability of a reduction from the current $950 million level. This facility and a $950 million three-year facility are primarily used to support HDFS's commercial paper program and to fund HDFS's lending activities and operations.

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. Excluding HDFS's financial results, Fitch estimates that HOG's manufacturing EBITDA margins in 2009 will be in the mid-teens and that manufacturing operations will have leverage (debt-to-EBITDA) of approximately 1.0 times (x) to 1.5x, pro forma for the recent bond transaction. HOG has some financial flexibility in its ability to reduce dividends and share repurchases.

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.

HDFS is currently in compliance with all covenants which include: HDFS's leverage covenant of 10:1x debt to equity and a minimum interest coverage ratio at the consolidated HOG level of 2.5:1. The revolver does not contain a material adverse change clause. In addition, HOG must maintain HDFS's fixed-charge coverage at 1.25x and minimum net worth of $40 million.

HDFS's operating performance has declined versus historical levels due to substantially reduced gain-on-sale revenue, retained interest impairments, mark-to-market losses on loans held for sale, increased funding costs, and rising provisions for losses. 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.

Fitch expects HOG's sales and operating margins will remain challenged throughout 2009 as discretionary spending will continue to be pressured by the financial crises and global economic slowdown. If economic conditions continue to worsen, Fitch believes that shipment reductions beyond HOG's announced 10% to 13% reduction this year could be possible. 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.

Cash used for HOG's recently announced restructuring actions will be as high as $105 million, most of which will be incurred this year. Fitch estimates HOG will also contribute a higher amount of cash to its pension funds this year, and there is a risk 2010 contributions could rise further. The company announced its capital expenditures will be reduced to $180 million-$190 million in 2009 from $232 million last year. HOG's dividend stands at $300 million annually, and share repurchase activity was suspended beginning in the company's last quarter. At Dec. 31, 2008, HOG's cash balance was $594 million.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ www.fitchratings.com ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.