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DCR Rates Harley-Davidson Funding Corp.'s Commercial Paper 'D-1'

18 November 1997

DCR Rates Harley-Davidson Funding Corp.'s Commercial Paper 'D-1'

    CHICAGO, Nov. 18 -- Duff & Phelps Credit Rating Co. (DCR) has
assigned an initial rating of 'D-1' (D-One) to Eaglemark Financial Services
Inc.'s (Eaglemark) commercial paper program, issued under 100 percent owned
subsidiary, Harley-Davidson Funding Corp.  Eaglemark  is a 97.8 percent
parent-owned subsidiary of Harley-Davidson Inc., which has a 'A+'
(Single-A-Plus) senior debt rating.
    The rating reflects Eaglemark's excellent asset quality and continued
strong collateral values on motorcycles.  In addition, parent Harley has a
strong market position and excellent financial condition.  Eaglemark has a
support agreement with Harley in which Harley must maintain Eaglemark's
fixed-charge coverage at 1.25 times and minimum net worth of $40MM.
Harley-Davidson Inc. must maintain majority ownership of Eaglemark and give
notice if ownership is going to drop below 80 percent.  Eaglemark's commercial
paper program will have 100 percent back-up coverage from a syndicated
revolver.
    The primary focus of Eaglemark is to provide wholesale and retail
financing, credit card and insurance services to dealers and customers of
Harley and other manufacturers with whom Eaglemark conducts business.  Total
owned and managed receivables at 9/30/97 were $840MM with loan volume of
$1.1 billion.  Credit losses on the owned and managed portfolio were 0.69% for
the nine-month period ended 9/30/97.  The minor losses on the owned and
managed portfolio are due to the quality of the consumer Eaglemark lends to
and the high collateral values of the motorcycles.  Total revenue for the
first three quarters of 1997 were $46.6MM, a 41 percent increase from the
prior year.  Debt to equity was 5.3 times.  Based on Eaglemark's growth plans,
we believe leverage will rise but will remain conservative.  The $500MM
commercial paper program will replace approximately $400MM of current funding.
    In the U.S., Harley-Davidson has a strong, premium market position in
heavyweight motorcycles, a segment that continues to grow significantly
(12 percent year-to-date and nearly 14 percent annually since 1991).  Harley
continues to gradually expand capacity as market demand increases, and it has
been regaining market share (after losing some share as market demand surged
ahead of capacity increases in the early 1990s).  Although it continues to add
capacity, Harley's strategy of expanding in steady increments somewhat
mitigates future risk by allowing a relatively quick curtailment in expansion
if the market outlook changes.  Also, Harley continues to allocate roughly
30 percent of its sales for export to a growing number of international
markets, and Harley's strong worldwide brand appeal should enable it to
further tap international markets, especially if needed to offset any dips in
domestic demand.
    With recent net profit margins of 10 percent, Harley's outstanding
profitability, along with the strong market growth, continue to attract new
competitive models from established Japanese nameplates, and even a small,
newly-formed competitive start-up.  Harley completed construction of a new
product development center in 1996, and it plans a cadence of new model
introductions to bolster its market leadership.
    Manufacturing operating cash flow is expected to remain strong at roughly
$200MM (or better) annually, and Harley should be able to internally fund the
capital spending to expand its production (to a target of more than
200,000 units in 2003, from 131,000 units this year) as well as make equity
contributions to Eaglemark to support further receivables growth and continue
dividends at approximately 12 percent of net income.  Harley has minimal
manufacturing debt (about $25 MM), and management is expected to maintain a
very conservative financial strategy, even if market demand should weaken.

SOURCE  Duff & Phelps Credit Rating Co.