Fitch Expects to Rate Harley-Davidson Financial's Unsecured Notes 'A'
KEY RATING DRIVERS - IDR and SENIOR DEBT
HDFS' ratings are linked to those of its parent, as Fitch believes the captive is a core subsidiary of HOG, which is evidenced by explicit and demonstrated support between the two entities. This is reflected by its close operating relationship with HOG and by a support agreement under which HOG must maintain HDFS' fixed-charge coverage at 1.25x and its minimum net worth at \$40 million.
Net proceeds from the issuance are expected to be used for general corporate purposes. Leverage, defined as total debt divided by tangible equity was 5.9x at Dec. 31, 2014. HDFS subsequently conducted a \$700 million term asset-backed securitization in January 2015, which increased pro forma leverage to 6.6x. Pro forma for the expected MTN issuance, leverage would increase modestly to 6.8x, which remains consistent with similarly rated captive finance peers but higher than many stand-alone finance companies. Fitch expects that leverage will remain within the historical range of 5x to 7x following the maturity of \$600 million of medium-term notes in September 2015.
The notes are expected to rank equally in right of payment with all existing and future unsecured and unsubordinated debt from time to time outstanding.
The ratings of the proposed note issuance are equalized with the IDR to reflect the level of unsecured debt in HDFS' funding profile and the availability of unencumbered assets, both of which enhance the company's financial flexibility in a stressed scenario. As of Dec. 31, 2014, unsecured debt represented approximately 64% of total debt and would increase to 67% on a pro forma basis after the MTN issuance, which is viewed favorably by Fitch.
RATING SENSITIVITIES - IDR and SENIOR DEBT
The expected ratings of the senior notes are sensitive to changes in HDFS' IDR, as well as the level of unencumbered balance sheet assets in a stress scenario, relative to outstanding debt.
HDFS' IDR and Rating Outlook are linked to HOG and therefore would change with any change in HOG's ratings. However, negative rating action could be driven by a change in the perceived relationship between HDFS and its parent. Additionally, a change in profitability leading to operating losses, meaningful deterioration in asset quality, material increase in leverage, difficulty accessing long-term funding, and/or a significant reliance on secured debt or other short-term funding sources could also yield negative rating action.
Fitch expects to assign the following expected rating:
Harley-Davidson Financial Services, Inc.:
--Senior unsecured notes 'A(EXP)'.
Fitch currently rates HDFS as follows:
--Long-term IDR 'A';
--Short-term IDR 'F1';
--Senior unsecured 'A';
--Commercial paper 'F1'.