DCR Upgrades Harley-Davidson Debt Ratings
16 March 2000
DCR 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, First Call's BondCall
Direct/Research Direct at http://www.firstcall.com and Multex at
http://www.multex.com, as well as through other third-party providers.