DCR Upgrades Harley-Davidson Debt Ratings
16 March 2000DCR Upgrades Harley-Davidson Debt Ratings
CHICAGO, March 16 Duff & Phelps Credit Rating Co. (DCR) has raised the senior unsecured debt rating of Harley-Davidson, Inc. from 'A+' (Single-A-Plus) to 'AA-' (Double-A-Minus) and the commercial paper rating of Harley-Davidson Funding Corp. from 'D-1' (D-One) to 'D-1+' (D-One-Plus). Harley-Davidson Funding Corp. is wholly owned by Harley- Davidson Financial Services, Inc. (formerly Eaglemark Financial Services, Inc.), which is a wholly owned subsidiary of HDI. Harley-Davidson Funding Corp. has a $600 million unsecured commercial paper program, under which approximately $375 million of commercial paper was outstanding on December 31, 1999. Harley-Davidson Financial Services has two syndicated credit facilities, a $350 million 364-day revolver and a $250 million five-year revolver, that provide 100 percent liquidity support for the commercial paper program. The rating action reflects the continued strong performance of HDI's motorcycle manufacturing operations, as well as HDI's conservative financial strategy and excellent financial condition. The rating action also specifically anticipates the sale of financial services' credit card business to U.S. Bancorp, a transaction expected to close in late March or early April. HDI has significantly increased its investment in new products, such as the redesigned Softailr line and the new Twin Cam 88B engine, whose success is bolstering the Harley brand's market position. Even with the additional investment, HDI's manufacturing operating profit margin continued to improve during 1999, increasing from 15.2 percent to 15.8 percent. Net income increased 25 percent, as a 17 percent increase in unit production along with a slight improvement in product mix and higher pricing drove a 19 percent increase in manufacturing revenues. The Rating Outlook is Stable. Cash flow from manufacturing operating activities should remain strong near term, providing internal funding of the capital investment needed to continue expanding production (capital spending is expected to be in the $150-170 million range in 2000) as well as supporting further receivables growth in financial services and continuing dividends at roughly 12 percent of net income. Free cash flow will be used primarily on repurchasing shares, particularly to offset dilution from the exercising of compensation stock options. HDI should be able to readily weather an economic downturn or other factors that may cause a substantial drop in demand. HDI has been averaging more than 20 percent overtime in manufacturing operations, which is an initial buffer against a decline in demand. Financial services operations have a conservative level of funding leverage in finance receivables (the ratio of balance-sheet finance receivables to external debt has been 1.6-1.8 times) and therefore should have substantial net operating cash inflows after any potential demand downturn lowers receivable balances. Finally, HDI has minimal manufacturing debt and a large cash balance (approximately $180 million at 12/31/99), a combination that offers further protection if market demand should dramatically weaken. DCR is a leading global rating agency with 34 local market offices providing ratings and research on debt issues and insurance claims paying ability in more than 50 countries. For additional research on HDI, visit DCR's web site at http://www.dcrco.com (Quick Search: Harley). DCR's research is also available on Bloomberg at DCR
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