A very interesting article written by Carol J. Loomis, senior editor-at-large at Fortune Magazine and reproduced today via CNN Money. The author of this article is both a friend of Warren Buffett and a Berkshire Hathaway shareholder.
“Today is an anniversary for motorcycle manufacturer Harley-Davidson that it would just as soon not remember. On February 3rd a year ago, with the stock market hurtling toward its March lows, Harley (HOG, Fortune 500) announced it had sold $600 million in five-year notes at a nosebleed interest rate of 15%. Yes, 15%, because the company needed the money to fund its finance company and had to pay what the market demanded. The market, in this case, included Warren Buffett, whose Berkshire-Hathaway (BRK.B) had been husbanding cash for years, and who was pleased to give $300 million of that money to Harley at 15%. The other $300 million was put up by Davis Advisors, a mutual fund company whose Chris Davis saw Harley notes as a fine investment for his funds (which, by the way, also own Harley stock).
The annual $90 million of interest those notes carry certainly didn’t help out Harley’s 2009 results, though a recession that was killing sales of discretionary goods would have led to a financial wreck in any case. For the year, Harley reported shipments that were down 27% from 2008 and ended up with a $55 million loss — its first red ink since 1993. Still, 2009 had its redeeming features for Harley, and these certainly began with its stock price. For the year, as investors anticipated the company regaining its zoom, its stock rose by 53%.
Meanwhile, the great 2009 bull-market in junk-bond prices was producing an astounding turn in interest rates. In December, Harley sold still another block of 5-year notes — $500 million — at a 5¾% rate. For swings in what it costs to do business, and for a reminder of just how remarkable the securities markets were in 2009, a 15% rate down to 5¾% is an amazing ride”
Blah Blah Blah- The Sky is falling. Sell, Sell, Sell.
Hmm- that’s pretty interesting that they were able to float paper for only 5 3/4%- if they can do that. then chances are they aren’t going down the tube, and make no mistake- when you’re forced to float 15% paper in a zero Fed Funds environment, you ARE going down the tube…..
Wonder if this is debt service money, or money earmarked to build plants in India? Hmmm……
So, if I understand correctly… Chris Davis of Davis Group, is a Harley Investor who could lose money due to Harley’s 600 million dollar 5 year 15 percent note program, has decided a good investment lies within the further 500 million dollar notes at 5.75 percent.
At what point does it start to sound like a boxing trainer betting on the other boxer?
The good news is that the motor company has money to lend at a much lower rate and that should help move some bikes. But the other side of the coin is HD has not made a profit last year and adding 28 million in yearly debt do to the interest charges can’t help. Sometimes if you dig a hole you can find gold, but sometimes if you dig too deep it too dificult to get out and you end up burried. Time will tell which way this is headed.