Harley Davidson Financing Leading the Pack 12 comments
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Some interesting items from the 10-Q released by Harley Davidson (HOG)
HDFS (Harley Davidson Financial Services)
Income from securitizations during the first six months of 2008 was lower as compared to 2007 due primarily to the loss on the first quarter 2008 securitization transaction and the absence of a second quarter securitization transaction. This compares to two securitization transactions completed in the first six months of 2007.
During the first six months of 2008, HDFS sold $540.0 million in retail motorcycle loans in a securitization transaction and recognized a loss of $5.4 million, or 0.99% as a percentage of loans sold. This compares to a gain as a percentage of loans sold of 1.9%, or $32.5 million, on $1.75 billion of loans securitized in the first six months of 2007. The loss in 2008 was driven by increased securitization funding costs due to capital market volatility and higher projected credit losses. During the first six months of 2008, HDFS retained $54.0 million of the subordinated securities issued by the securitization trust. The subordinated securities that were retained have been included in the investment in retained securitization interests (a component of finance receivables held for investment) in the Condensed Consolidated Balance Sheets. The cash proceeds from the 2008 securitization transaction are net of the cost of the retained subordinated securities.
Additionally, income from securitizations was negatively impacted during the first six months of 2008 by a $6.3 million write down of certain retained securitization interests. The write down, which occurred in the second quarter of 2008 and is considered a permanent impairment, resulted from a decline in the fair value of certain retained securitization interests due to higher actual and anticipated credit losses on those securitization portfolios. This compares to an impairment charge of $3.5 million incurred during the first six months of 2007.
Annualized losses on HDFS’ managed retail motorcycle loans were 2.14% during the first six months of 2008 compared to 1.63% during the first six months of 2007. The 30-day delinquency rate for managed retail motorcycle loans at June 29, 2008 increased to 4.65% from 4.36% at July 1, 2007. Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. The increase in losses was primarily due to a higher incidence of loss resulting from an increase in delinquent accounts. The Company expects that HDFS will continue to experience higher delinquencies and credit losses as a percentage of managed retail motorcycle loans in 2008 as compared to 2007.
I would have though that these might have been worse than reported. The 30 day delinquency was essentially flat and portfolio losses were only .6% higher despite the credit market conditions. Harley Davidson's lending arm is doing markedly better that either auto or credit card lenders are currently. With some visibility returning to credit markets, these might be the highest these ratios get and we could see additions to earnings from here on out.
Financing Activities
The Company’s financing activities consist primarily of share repurchases, stock issuances, dividend payments and finance debt activity. During the first half of 2008, the Company repurchased 3.8 million shares of its common stock at a total cost of $150.1 million. The Company repurchased 3.1 million of these shares under a general authorization provided by the Company’s Board of Directors in October 2006 to buy back 20.0 million shares. As of June 29, 2008, no shares remained under this authorization.
The remaining 0.7 million shares were repurchased under an authorization granted by the Company’s Board of Directors in December 2007, which separately authorized the Company to buy back up to 20.0 million shares of its common stock. In addition, the Company also has an authorization from the Company’s Board of Directors that is designed to provide the Company with continuing authority to repurchase shares to offset dilution caused by the exercise of stock options and the issuance of nonvested stock. Please see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” for additional details regarding the Company’s share repurchase activity and authorizations.
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This article has 12 comments:
" Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. "
So based on my reading, the loan losses did not increase all that much (to 4.65%). HOWEVER, the loan losses that make up that figure include losses from the loans that HOG packaged and sold to third-parties.
Hmmm... Wonder if the loans HOG was able to package and sell differ in any way from those it was forced to keep on its books... And if there is a difference, wonder if the loan loss ratio will start to creep into the double-digits for loans HOG still holds.
---
Uh, net charge-offs ran at 0.6% of the on-balance sheet portfolio and loan loss provisions ran at 226% of net charge-offs. These are annualized numbers, so dividend by four for the quarterly rate. Loan loss allowances at the end of the quarter were equal to 157% of the annualized net charge-off rate. Given these numbers (look it up in the Q), I wonder about what kind of smoke and mirrors Mallarde is using.
And how discretionary is it when they take "charge-offs"?
On Aug 07 08:37 AM User 183867 wrote:
> For those with the patience to power through the above article, here
> is where the smoke and mirrors comes in:
>
> ---
>
> Uh, net charge-offs ran at 0.6% of the on-balance sheet portfolio
> and loan loss provisions ran at 226% of net charge-offs. These are
> annualized numbers, so dividend by four for the quarterly rate. Loan
> loss allowances at the end of the quarter were equal to 157% of the
> annualized net charge-off rate. Given these numbers (look it up in
> the Q), I wonder about what kind of smoke and mirrors Mallarde is
> using.
You asked about the quality of the on-balance sheet portfolio, so I gave you the answer because you apparently cannot access or interpret the data yourself. Sorry you don't like the answer, but the implication of your question about retaining the crap they couldn't sell is without merit.
How discretionary are their charge-offs? Why don't you figure out how to analyze delinquency roll rates, frequency of loss, severity of loss, and reserving and then get back to us on that.
How many days accumulate before a dealer starts paying on there floor plan and is the plan flexible?.
If you would how doe's the Euro market affect your market ?
I find this interesting. It was stated by HD that the reason they bought MV Agusta was to penetrate the Euro market because the average buyer is much younger and sport bike oriented .I'm assuming that there cruiser market is close to being saturated,
If the repo bikes are bringing such a high dollar then the dealer should be able to undercut on a zero mile new bike,correct?
I'am assumming that a repo auction is the same in every state where as the unit has to be on hold and notice to the public for sale X amount of days before public auction and at time of sale a sizeable non refundable deposit is required. If a buyer has good credit plus the cash for deposit then why would you buy a used bike at 128%over book.
Please bring us up to date with a good reply. Thanks and good luck.
On Aug 11 11:12 AM HDDEALER wrote:
> I am a dealer for HD and they are making a killing on their repos
> sold at auction. All repos are selling for 128% of retail book value.
> They are enjoying this favorable position because of the vibrant
> market in Europe and their domestic dealers are suffering, because
> they are priced out of this market for used product. Where on the
> balance sheet do these numbers from Repo Sales show up? Or do they?
I doubt HOG would call this a profit center. In the real estate context, they avoid foreclosures in part because of their expense.
On Aug 11 01:37 PM FUJIMO wrote:
> HDDEALER.
> How many days accumulate before a dealer starts paying on there floor
> plan and is the plan flexible?.
> If you would how doe's the Euro market affect your market ?
> I find this interesting. It was stated by HD that the reason they
> bought MV Agusta was to penetrate the Euro market because the average
> buyer is much younger and sport bike oriented .I'm assuming that
> there cruiser market is close to being saturated,
> If the repo bikes are bringing such a high dollar then the dealer
> should be able to undercut on a zero mile new bike,correct?
> I'am assumming that a repo auction is the same in every state where
> as the unit has to be on hold and notice to the public for sale X
> amount of days before public auction and at time of sale a sizeable
> non refundable deposit is required. If a buyer has good credit plus
> the cash for deposit then why would you buy a used bike at 128%over
> book.
> Please bring us up to date with a good reply. Thanks and good luck.
>
>
> On Aug 11 11:12 AM HDDEALER wrote:
>
> > I am a dealer for HD and they are making a killing on their repos
>
> > sold at auction. All repos are selling for 128% of retail book
> value.
> > They are enjoying this favorable position because of the vibrant
>
> > market in Europe and their domestic dealers are suffering, because
>
> > they are priced out of this market for used product. Where on the
I doubt HOG would call this a profit center. In the real estate context, they avoid foreclosures in part because of their expense.
---------
Credit losses are part and parcel of the lending business, a business which is damned profitable for Harley-Davidson. Credit losses are an expense like any other. Those companies that manage them best, which is what a high recovery value on recovered collateral means, relative to revenues win. Saying H-D can't have losses is like saying a business can't incur expenses; in other words, nonsense. H-D incurs low frequency of losses and low severity once it does, which are two good reasons why its pretax pre-provision ROA is so high and why the after-tax ROA and ROE are so attractive. In addition, the asset integrity and the capital integrity of the company's balance sheet is high because of the low severity of its loan losses. These evince adequate reserves, the quality of the balance sheet, and the quality of the income statement.
On Aug 11 09:42 PM User 183867 wrote:
> But doesn't HOG lose on the lost financing contract with the original
> buyer? So they sell for 28% over what they sell to the dealer, but
> they lose their loan and they have to pay all costs involved in foreclosing
> on a loan.
>
> I doubt HOG would call this a profit center. In the real estate context,
> they avoid foreclosures in part because of their expense.
>
> ---------
>
> Credit losses are part and parcel of the lending business, a business
> which is damned profitable for Harley-Davidson. Credit losses are
> an expense like any other. Those companies that manage them best,
> which is what a high recovery value on recovered collateral means,
> relative to revenues win. Saying H-D can't have losses is like saying
> a business can't incur expenses; in other words, nonsense. H-D incurs
> low frequency of losses and low severity once it does, which are
> two good reasons why its pretax pre-provision ROA is so high and
> why the after-tax ROA and ROE are so attractive. In addition, the
> asset integrity and the capital integrity of the company's balance
> sheet is high because of the low severity of its loan losses. These
> evince adequate reserves, the quality of the balance sheet, and the
> quality of the income statement.
------
So they are not supposed to foreclose on loans? This is like saying a car manufacturer should not incur steel costs, labor costs, or costs for tires. It's a fact of life; loans go bad and you have to repossess. The idea is to look at the loss experience via frequency and severity and compare that against net interest income + fee income - noninterest expenses, look at that versus asset and capital, and make your judgment from there. Just saying "they take losses, ergo it's bad" is a pointless argument, if that's what you're trying to say.
On Aug 15 11:18 PM User 183867 wrote:
> User, you are getting a little didactic. I never said they could
> not suffer losses in their lending business. I just questioned whether
> foreclosing on loans and auctioning off used motorcycles was a good
> thing or not for HOG. I suspect it is not.
>
> ------
>
> So they are not supposed to foreclose on loans? This is like saying
> a car manufacturer should not incur steel costs, labor costs, or
> costs for tires. It's a fact of life; loans go bad and you have to
> repossess. The idea is to look at the loss experience via frequency
> and severity and compare that against net interest income + fee income
> - noninterest expenses, look at that versus asset and capital, and
> make your judgment from there. Just saying "they take losses, ergo
> it's bad" is a pointless argument, if that's what you're trying to
> say.