Fitch Rates Harley-Davidson's Proposed Notes 'A'

CHICAGO--()--Fitch Ratings has assigned a rating of 'A' to Harley-Davidson, Inc.'s (HOG) proposed $750 million issuance of 10- and 30-year senior unsecured notes. The Issuer Default Rating (IDR) for HOG is 'A' and the Rating Outlook is Stable.

Proceeds from the proposed notes will be used to repurchase shares of HOG's common stock under the company's previously-approved share repurchase program. The proposed notes will be the only debt outstanding at HOG's motor company, as it has operated without debt since February 2014. Currently, all of the company's existing debt has been issued by Harley-Davidson Financial Services, Inc. (HDFS), the company's captive finance subsidiary.

KEY RATING DRIVERS

HOG's ratings incorporate the company's plan to fund a portion of its share buybacks with debt. Although this recapitalization plan, when announced, represented a material change from Fitch's prior expectation that the motor company would remain debt free over the long term, Fitch expects the motor company's leverage to remain relatively low following the issuance and believes it will be consistent with the 'A' IDR. However, headroom within the rating will be diminished by the addition of leverage, increasing the possibility of a downgrade in a severe market downturn.

Aside from the recapitalization plan, Fitch expects many of the HOG's fundamental credit qualities to remain intact, even with foreign exchange-related pressures that have affected the company's sales in the first half of 2015. HOG continues to lead the U.S. heavyweight motorcycle segment by a wide margin and its credit profile is still supported by strong liquidity, high margins and well-funded pension plans. Fitch views the proposed notes issuance as a one-time event and does not expect the company to issue any further motor company debt over the long term.

The substantial strengthening of the U.S. dollar over the past several quarters has negatively affected HOG's business. The company builds most of its motorcycles in the U.S., but with more than a third of its sales generated outside the U.S., there is an increasing mismatch between the company's U.S. dollar-based cost structure and the revenue derived from its foreign currency-denominated non-U.S. sales. Adding to the pressure, many of HOG's competitors in the U.S., mostly Japanese and European manufacturers, have taken advantage of the strong U.S. dollar by heavily cutting prices, some by as much as $3,000 off the manufacturer's suggested retail price.

Despite the recent pressures, HOG's fundamental business position and credit profile remain relatively strong. The company commands nearly half of the U.S. heavyweight motorcycle market, and it maintains the top market share in each of its targeted outreach demographic segments. In addition, the company's flexible manufacturing process has helped to support its profitability in the face of lower sales and foreign exchange pressure. Based on Fitch's calculations, HOG's motor company EBITDA margin in the 12 months ended March 29, 2015, was 22.1%, and although it is likely to decline for the full-year 2015, Fitch expects it to remain at least in the high teens, which would be strong for the sector. Fitch also expects free cash flow (FCF) to remain relatively strong, with FCF margins in the high-single-digit range.

Fitch expects other elements of the motor company's credit profile to remain solid despite the expected increase in debt and heavy share repurchase activity. Fitch estimates motor company EBITDA (debt/Fitch-calculated EBITDA) leverage will rise to about 0.7x following the issuance, up from zero currently but still relatively low by industry standards. Fitch also expects funds from operations (FFO) adjusted leverage to rise to about 0.9x from 0.1x prior to the issuance. Based on the motor company's performance in the last downturn, Fitch expects leverage would remain at or below 1.0x at the cyclical trough, assuming no further debt issuance.

Fitch expects HOG to maintain a strong liquidity position, as the company continues to follow a strategy of maintaining a sufficient amount of liquidity (cash and revolver capacity) to meet its consolidated liquidity needs on a rolling 12-month basis (including HDFS). As noted above, Fitch expects FCF to remain relatively strong despite an increase in capital spending and common dividends (although the latter will decline as a result of the increased share repurchases.) The midpoint of the company's 2015 capital spending guidance is $250 million, up from actual capital spending of $224 million in 2014, and in February 2015, HOG raised its dividend per share by about 13%.

KEY ASSUMPTIONS

--Heavyweight motorcycle demand grows modestly in the U.S. and Western Europe over the next several years, with faster growth in developing markets like China and India.

--HOG's U.S. market share remains at or above 50% over the intermediate term.

--Margins grow modestly over the forecast period as motorcycle production increases, but in the near term, margins are pressured by negative foreign exchange.

--Capital spending rises through the intermediate term to support new product development.

--The motor company issues $750 million in debt in 2015, but it issues no further debt after that.

RATING SENSITIVITIES

Positive: Due to the inherent cyclicality and risk of the motorcycle industry, Fitch does not anticipate upgrading the ratings of HOG or HDFS in the intermediate term.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A severe downturn in global heavyweight motorcycle demand;

--An inability to maintain motor company leverage below 1.2x through the cycle;

--A shift in business strategy away from a focus on the namesake brand;

--A need for HOG to provide material support to HDFS.

Fitch currently rates HOG as follows with a Stable Rating Outlook:

--IDR 'A';

--Senior unsecured notes 'A'.

Date of Relevant Committee: 23 July 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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Contacts

Fitch Ratings
Primary Analyst
Stephen Brown,+1-312-368-3139
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Peter Molica, +1-212-908-0288
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Brown,+1-312-368-3139
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Peter Molica, +1-212-908-0288
Senior Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540 (New York)
alyssa.castelli@fitchratings.com