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Rating Action:

Moody's downgrades Harley-Davidson Sr. unsecured rating to Baa1 and affirms P-2 short-term rating. Outlook is stable.

05 Sep 2019

New York, September 05, 2019 -- Moody's Investors Service ("Moody's") downgraded the senior unsecured ratings of Harley-Davidson, Inc (Harley-Davidson) and Harley-Davidson Financial Services, Inc. (HDFS) to Baa1 from A3. HDFS's short-term rating is affirmed at Prime-2. The Outlook is stable.

RATING RATIONALE

The ratings reflect Moody's expectation that Harley-Davidson's EBITA margins are unlikely to exceed the upper single digit level, well below historic levels, even with the company's extensive marketing and operating initiatives. This margin pressure is a result of the prolonged decline in demand in Harley-Davidson's core US market. Demand is suffering from shifting demographics that erode the popularity of the heavyweight motorcycle segment, and from the highly discretionary nature of Harley-Davidson's products. For example, through June 2019, industry shipments in the 600cc-and-higher-displacement segment have fallen by 22% compared with peak levels reached in 2015. During this same period, Harley-Davidson's EBITA margins have declined steadily from 18% to approximately 7%. In addition to the severe challenges being posed by the structural/demographic challenges facing its motorcycle operations, Harley-Davidson must also contend with the additional risks posed by the pronounced cyclicality of its markets.

Harley-Davidson is implementing a number of initiatives under its More Roads to Harley-Davidson revitalization program including: 1) consolidating its US manufacturing footprint; 2) launching an aggressive new product program; and 3) targeting growing segments of the European motorcycle market. The company has also taken two actions that will benefit near-term earnings. First, it will shift production of European-bound product to its Thailand facility in order to avoid 31% tariffs that the EU imposes on motorcycles imported from the US. Second, it has largely completed the multi-year restructuring program for its US assembly facilities. These two actions should enable Harley-Davidson to achieve EBITA margins in the high single-digits by the end of 2020.

In addition to these operating initiatives, Harley-Davidson is expected to continue operating with a comparatively strong leverage profile, at both the motor company and HDFS. Harley-Davidson's ratio of debt-to-EBITDA is a prudent 1.5x, while the finance operation's level of debt-to-equity is appropriate at 7:1. Moreover at June 30, HDFS' 30-day delinquencies were 3.3% (in line with delinquency levels maintained over the past three years) and annualized losses-to-average-assets were 1.8%, all measures of a strong finance company portfolio.

The stable rating outlook anticipates that Harley-Davidson will make gradual but steady progress in pursuing operational initiatives that will improve margins of its motorcycle operations. The outlook also expects that the underwriting and leverage profile of HDFS will remain consistent with recent practices. This includes HDFS leverage that does materially exceed the 7:1 or 8:1 range.

The company has an adequate liquidity profile, considering Harley-Davidson and HDFS together. Principal liquidity sources include $924 million of cash and $1.7 billion in committed credit facilities. This $2.6 billion in sources adequately cover HDFS' $2.4 billion of debt that matures during the coming twelve months. Nevertheless, the company will remain reliant on continued access to the markets to refinance maturities beyond 12 months.

The rating could be upgraded if Harley-Davidson's efforts to grow motorcycle ridership in the US and to expand its position in European markets are successful. These successful operating initiatives would need to result in EBITA margins sustained in the low-to-mid teens range, with debt-to-EBITDA sustained under 2x.

The rating could be lowered if Harley-Davidson is unable to arrest the decline in shipments in its core US markets, or capture an increasing share in product categories and in geographic markets. This lack of success, and consequent pressure on the rating, would be reflected in EBITA margins below 8%. The rating could also be lowered with Moody's expectations of a steady and material increase in financial leverage with debt-to-EBITA approaching 3x or free cash flow below $250 million.

Environmental, social and governance factors do not pose significant risks for Harley-Davidson. The company does not face major emission regulation burdens; within the personal transportation sector its products are viewed as more socially responsible than automobiles; and, its governance practices have supported prudent financial practices, preservation of its important brand image, and timely responses to market, tariff and foreign exchange challenges.

The principal methodologies used in rating Harley-Davidson, Inc. were Automobile Manufacturer Industry published in June 2017, and Captive Finance Subsidiaries of Nonfinancial Corporations published in August 2019. The principal methodologies used in rating Harley-Davidson Financial Services, Inc. were Finance Companies published in December 2018, and Captive Finance Subsidiaries of Nonfinancial Corporations published in August 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The following rating actions were taken:

Affirmations:

..Issuer: Harley-Davidson Financial Services, Inc.

....Senior Unsecured Commercial Paper, Affirmed P-2

Downgrades:

..Issuer: Harley-Davidson, Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

..Issuer: Harley-Davidson Financial Services, Inc.

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa1 from (P)A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

Withdrawals:

..Issuer: Harley-Davidson Funding Corp.

....Senior Unsecured Medium-Term Note Program, previously rated (P)A3

Outlook Actions:

..Issuer: Harley-Davidson Financial Services, Inc.

....Outlook, Remains Stable

..Issuer: Harley-Davidson, Inc.

....Outlook, Remains Stable

..Issuer: Harley-Davidson Funding Corp.

....Outlook, Changed To Rating Withdrawn From Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

With reference to the withdrawal of the ratings of Harley-Davidson Funding Corp.: The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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