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Fitch Affirms Harley-Davidson's Ratings; Outlook Revised to


CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on HarleyDavidson, Inc. (HOG) and its Harley-Davidson Financial Services, Inc. (HDFS) and Harley-Davidson
Funding Corp. (HDFC) subsidiaries as follows:
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';
--Senior unsecured rating affirmed at 'BBB+';
--Rating Outlook revised to Stable from Negative.
--Long-term IDR affirmed at 'BBB+';
--Short-term IDR affirmed at 'F2';
--Rating Outlook revised to Stable from Negative.
--Long-term IDR rated 'BBB+'; Outlook Stable;
--Short-term IDR affirmed at 'F2';
--Senior unsecured rating affirmed at 'BBB+';
--Short-term debt rating affirmed at 'F2'.
HOG's ratings apply to $600 million in senior unsecured debt. HDFC's ratings apply to
approximately $2.1 billion of senior unsecured debt.
HOG's ratings reflect the company's leading position in the U.S. heavyweight motorcycle segment,
robust cash liquidity position and relatively low leverage in the motorcycle operations segment.

Although motorcycle market conditions in the U.S. remain weak, with industry sales projected to be
down for the full year in 2010, the market appears to be stabilizing and Fitch expects the industry
could return to growth in 2011. HOG's continued progress on restructuring activities, begun in
2009, are expected to provide much needed manufacturing flexibility and lower costs over the next
several years, while the discontinuation of the Buell motorcycle line and the eventual sale of MV
Agusta will increase the company's focus on the core Harley-Davidson brand. HDFS' performance
also has improved materially over the past 12 months, as funding costs have declined and both
delinquency rates and loss expectations have improved. The aforementioned items also support the
revision of the Rating Outlook to Stable from Negative. The primary near-term risk to HOG's credit
profile is the potential for a negative turn in the global economy that would result in further
depressed motorcycle demand.
In 2009, HOG experienced a nearly 27% decline in motorcycle shipments to dealers, as the global
recession drove a 23% decline in worldwide retail sales of Harley-Davidson motorcycles. Although
HOG was able to mitigate the effect of the downturn somewhat by growing its share to 53% of the
U.S. heavyweight motorcycle market (from 46% in 2008), total motorcycle and related products
revenue declined by a steep 23% for the full year. Since the demand trough in the second quarter of
2009, when HOG's retail sales were down 30% year-over-year, the rate of decline has improved, with
sales in the first quarter of this year down about 18% and down only 5.5% in the second quarter,
albeit against a very weak comparison period. Although Fitch does not expect positive full-year sales
growth in 2010, the deceleration in the rate of decline is encouraging, and Fitch expects that sales
could begin to grow in 2011. This market stabilization, along with positive mix effects, should help to
support revenue this year, with sales of higher priced Touring and Custom motorcycles projected to
comprise a relatively higher share of HOG's overall motorcycle revenue than lower-priced Sportster
models. As such, although Fitch expects HOG's full-year revenue to be lower than 2009, the decline
in revenue likely will be less than the decline in units shipped.
In reaction to the challenges posed by the recession-driven decline in motorcycle demand, in 2009
HOG began work on a comprehensive restructuring program, with the primary objectives of
reducing costs and increasing the flexibility and responsiveness of the company's manufacturing
operations. The various initiatives included in the program include a number of facility
consolidations, the restructuring of the company's York, Pa., manufacturing facility to focus on
certain core operations, cessation of the Buell motorcycle brand and the sale of MV Agusta, the
Italian motorcycle manufacturer acquired by HOG in 2008. The multiyear restructuring program is
slated to be complete in 2012 and ultimately will result in headcount declines of up to 3,600
employees in the company's motorcycle operations and 100 at HDFS. Although HOG estimates the
total cost of the restructuring will be between $430 million and $460 million once it is complete, the
company expects that it will result in annual benefits of $240 million to $260 million. In 2010, HOG
expects to realize $135 million to $155 million in annualized benefits, with all but a small portion of
the program's full benefits in place by year-end 2011. In addition to the program's direct cost
savings, Fitch expects the increased manufacturing flexibility, which will allow all of the company's
manufacturing facilities to produce all of the company's motorcycle products, to aid in HOG's ability
to react quickly to changing market dynamics, further strengthening the company's operating
margins. Fitch expects the motorcycle operations unit could produce EBITDA margins of 19% to
20% or more over the medium term as benefits from the restructuring take hold.
The credit profile of HOG's motorcycle operations weakened in 2009, as earnings and free cash flow
declined and the company issued $600 million in privately placed senior unsecured notes at a very
high 15% coupon. Proceeds from the notes, which mature in 2014, were temporarily used to bolster
HDFS' liquidity position during a period when the credit markets were largely frozen. With HDFS'
ability to access more typical sources of funding restored, the proceeds were returned to HOG late

last year. The weaker operating performance and the addition of the notes to its capital structure
drove leverage (debt/EBITDA) up at the motorcycle operations unit to 1.0 times (x) at year-end 2009
from 0.2x at year-end 2008, when the motorcycle operations unit only had $182 million of credit
facility debt associated with the MV Agusta acquisition outstanding. Fitch expects leverage to
improve to below 1.0x by year-end 2010, however, as EBITDA rises with improvements in the
company's margins and the outstanding MV Agusta-related debt is paid down. The motorcycle
operation's cash liquidity, which stood at $1.3 billion at the end of the 2010 second quarter, is
expected to remain very strong over at least the medium term and puts the unit in a negative net
debt position. Free cash flow for the full year 2010 could be very low, or potentially negative,
however, as consolidated capital expenditures rise to an estimated $235 million and $255 million
(including $95 million to $110 million of restructuring expenses), up from actual consolidated capital
spending of only $117 million in 2009. Beyond 2010, Fitch expects free cash flow to be stronger,
which will further bolster the company's liquidity position.
HDFS' financial performance for the six months ended June 27, 2010, improved as operating income
was $88 million versus an operating loss of $79 million (including $28 million of goodwill
impairment) in the first half of 2009. The improvement in operating income was due to higher
interest income which benefited substantially from higher average retail finance receivables, driven
by the consolidation of formerly off-balance sheet receivables. In addition, HDFS' asset quality
performance is showing evidence of stabilization, which may reduce the need to increase
provisioning; however, it is too early to tell if the positive trends will continue. Although the
company's decision to maintain HDFS as it is currently structured means that it will not have the
more stable funding source that a sale or partnership could have provided, it does allow HOG to
maintain full control over this key component of its overall business and ensures that the objectives
of the operating and financing arms remain aligned.
Asset quality performance has shown stabilization and, recently, improvement. Annualized losses on
HDFS' managed retail motorcycle loans were 2.04% during the first half of 2010 compared to 2.69%
during the first half of last year. The 30-day delinquency rate for managed retail motorcycle loans at
June 27, 2010 decreased to 4.5% from 4.97% at June 28, 2009. The decrease in credit losses from
the first half of 2009 was due to a lower frequency of loss and improvement in the recovery values of
repossessed motorcycles. With the improvement in delinquencies and recovery values, asset quality
performance has been better than expected. Improving inventory levels at dealers will improve the
supply/demand dynamic, stabilizing recovery rates. Also, higher underwriting standards at HDFS
have resulted in an increase in the percentage of prime customers in the retail portfolio, which has
helped to improve asset quality performance.
HDFS' access to the capital markets has improved in conjunction with the overall markets. With the
completion of the securitizations in 2009 and the change in accounting bringing all off-balance sheet
receivables on balance sheet, the amount of unencumbered collateral available for the unsecured
debt holders is a concern. Although the level of secured debt to total debt has shown improvement
from 72% in 2006 to its current level of 58%, the level remains high. Fitch will look for HDFS to
continue to develop and execute contingency funding plans to meet funding requirements and
diversity for the future.
Offsetting near-term liquidity concerns at HDFS, HOG has taken steps to improve its liquidity
position, which could be used at the HDFS level in a stress scenario. HDFS' funding needs for the
remainder of 2010 and 2011 have largely been satisfied by the renewal of expiring facilities, the
execution of securitizations, and the issuance of a $500 million medium-term note. Fitch expects that
HDFS will have available funding to meet needs through next year.

The primary near-term risk to HOG's credit profile is the potential for another economic downturn to
further pressure motorcycle demand and delay a return to growth in unit sales. This could result in
another weakening of the company's credit metrics and put some pressure on the company's liquidity, especially if
the downturn is accompanied by another tightening of the credit markets. In particular, to the extent
that HDFS is unable to obtain a stable source of ongoing funding under such a scenario, HOG could
be required to provide financial support to HDFS, weakening the operating unit's liquidity position.
This being said, HOG currently is in a much stronger position to withstand another downturn than it
was in late 2008. Along with changes in key management personnel over the past 15 months has
been a shift toward a more conservative stance on financial policies, which can be seen in the
company's liquidity strategy, as well as its strategic decision to focus solely on the Harley-Davidson
Although the aforementioned changes have positioned the company to better withstand another
downturn, they cannot insulate it completely, and a negative rating action could follow another
downturn if the company's credit profile is materially weakened. A positive rating action could follow
a return to growth in the motorcycle market, a decline in leverage at the manufacturing operations
and/or continued improvement in the performance of HDFS.
HOG's ratings reflect the application of Fitch's current criteria, which are available at
'' and specifically include the following reports:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 27, 2007);
--'Cash Flow Measures in Corporate Analysis' (Oct. 12, 2005);
--'Global Financial Institutions Rating Criteria' (Dec. 29, 2009);
--'Finance and Leasing Companies Criteria' (Dec. 30, 2009);
--'Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships' (Dec. 30, 2009).
Additional information is available at
Related Research:
Liquidity Considerations for Corporate Issuers
Cash Flow Measures in Corporate Analysis
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships
Corporate Rating Methodology