On Tues 3 Feb, news that Warren Buffett had put $300 million into Harley Davidson (HOG) gave the shares a big boost. That $300 million was part of a 5-year, $600 million HOG bond issue, not a stock purchase. More importantly, those bonds carry a 15% interest rate. The fact that Harley Davidson needed to pay 15% to borrow money indicates the market has some big worries about the company’s financial health.
According to a Wall St. Journal article, HOG has “a $500 million credit line that expires at the end of March, as well as another $950 million due in July.” The Berkshire money and the other $300 million from Davis Selected Advisers LP gets HOG through March, but unless I’ve missed something they need to find a way to roll over or refinance the $950 million coming up in July.
The same WSJ article reports that in late January “the financing arm was looking to borrow unsecured debt or tap into federal funds.”
Revenues and net income have been falling for the past 3 quarters. HOG now faces a quarterly headwind of $22.5 million to service the new debt. That’s nearly one third of last quarter’s earnings – earnings that have been declining.
As much as I would like to see Harley Davidson thrive, I don’t see where the sales to generate higher earnings will come from. Consumers aren’t likely to start buying big ticket, nice-to-have items anytime soon. And no matter how much you like the rumble of the big V-twins, the vast majority of Harley Davidson sales are not need-to-haves.
In a deal like this, the two big-name investors could probably have negotiated for common stock or preferred stock instead of bonds if they wanted. The 15% coupon and the fact that bonds are higher in the capital structure than preferred or common are warning flags for stockholders. [more]