Archive for October 17th, 2008

If you have a finance fever then the only prescription is more cowbell – Guess what?!  Harley-Davidson Financial Services (HDFS) has got COWBELL, and when they’re done we’ll all be wearing gold-plated diapers.  NOT!

With credit markets in the deep freeze, financial details are starting to leak out on how HDFS aggressively went after a “lower-quality borrower” to gain market segment share against other lenders.  Sound familiar?  Ever hear of WAMU?  According to new reports between 2003 and 2006, the percentage of HDFS borrowers paying 15% or more in interest — an indicator of credit risk — increased from 8% to 19%.  In addition HDFS’ share of Harley’s operating income grew to more than $200 million or about 15% of the company total, up from 7% in 2000.

Then loan delinquency rates started to rise where they are now more than 4%. The simultaneous reduction of motorcycle production and continuation of chasing marginal borrowers are problematic for Harley.  Remember the “Stick it to the Man” campaign in 2007? An offering of zero money down and teaser interest rates as low as 2.99%.  Everything’s “golden” as long as HDFS could package loans and sell them as securities to investors.  But, in the first quarter of 2008, HDFS was forced to keep $54 million in loans as very few investors would touch them. Then in Q2’08 even fewer buyers stepped-up as loan delinquencies kept rising.  As a result, Harley’s finance arm has increased loan collection staff and is making more calls on weekends and evenings to chase down deadbeats. With credit being nearly “inaccessible” to marginal borrowers, HDFS has eliminated its no-money-down financing offers, reserving them for the most creditworthy customers.

So how will Harley raise capital to fund this business going forward?  They either lack the ability or were unwilling to recognize that the entire economic infrastructure of the U.S. was being undermined by the housing crisis.  As a result producing more and more motorcycles that are being financed by a self-serving organization in a false, paper economy bites you in the butt.

Full disclosure: I own zero HOG stock.

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