Harley-Davidson (NYSE: HOG) is cruising back into the securitization market for the first time in three years, with a collateral pool possibly worth as much as $ 658 million.
Because the asset -backed securities feature high ratings from Moody's Investor Services and Fitch Ratings, and the loans being securitized have high FICO scores, the looks like the motorcycle maker is dealing with strength that should find a ready market.
Securitization is the process of bundling individual assets together into a group and then selling partial interests in the entire pool of assets. One that many people are familiar with is mortgages. Harley-Davidson is bundling together the loans or leases that buyers have taken out on its motorcycles and it is selling them to investors for an upfront payment instead of collecting the monthly note amount over the life of the loan or lease. [1
Although this seems to be be a not positive for Harley-Davidson, the underlying trends highlights are still facing difficult times
When a bike is like a mortgage
According to a pre-sale report from Moody's, the pools of securities have loans with an average balance of over $ 15,800, a weighted average borrower FICO score of 757, and an average APR of 6.64%. The total value of the loans is well above the $ 302 million securitization Harley did last time it was in the securitization market in 2016, and the FICO scores were higher too. There is, however, a slight increase in the average length of the original loan terms, from 70 months to 71 months, with less than 2% of the loans having under four years remaining.
The problem is that a six- year loan is a very long time for a motorcycle, because it indicates the buyers can not come up with a down payment to lower the principal. Instead, they're extending the terms to reduce their monthly payments. The results in paying much more for the motorcycle over the repayment period, and it also means the buyer hours more than the bike is worth for an extended period of time.
Loans in the securitization pool from 61 months to 72 months account for 36% of the total, while 73 to 84 months – seven years! – make up 28%. So even supposedly well-qualified buyers are extending payments into the future.
Any economic downturn will make it hard to maintain the buyer already really could not afford to be in the first place, and also difficult to unload.
Rising loss rates
Moody's notes that annualized net losses or 1.77% They were higher than they were in the recent past, and Harley says first-quarter lost rose to 2.22%, as its 30-day delinquency rate rose to 3.73% from 3.31% a year ago. Total past due receivables, however, fall year over the first quarter. Harley expects the number of delinquencies to rise as the targets more subprime customers.
Because of the higher rate of prime borrowers in this securitization, though, Moody's anticipates cumulative net losses from the deal or just 1.5% for the deal, while Fitch It at 1.6%
What happens when things turn ugly
Harley-Davidson's motorcycles are expensive, and the bike maker has been loath to cut prices in response to falling sales. It does not have to be the premium associated with the brand, so price is more important than volume. While it has offered some promotional discounts occasionally, it has been a targeted affair and not all of it broad-based like its rivals.
That has meant Harley's profit margins have remained intact, but sales have fallen for four consecutive years. Last year, sales tumbled by double-digit rates. It's made more difficult by the flood of lower-priced used bikes that compete with new ones. Although Harley customs analysts during its first quarter earnings conference call that prices of used Harleys in its dealer network rose for the seventh consecutive quarter, they are still exceptionally low when compared with the cost of a new motorcycle.
Even though it's building out smaller bikes that will presumably carry lower price tags, they're going to be built first for foreign markets where it's going to have a difficult time breaking the chokehold existing manufacturers have on share in those countries.
Harley-Davidson has some $ 5 billion in finance receivables, meaning its return to the securitization market after the long hiatus. Unfortunately, the brother's motorcycle market isn't changing either, and that's a serious situation for the bike maker.