With credit markets frozen, Chief Crook James Zoomer faces some tough decisions. RBC Capital Markets analyst Edward Aaron argues that investors "need to know how [Harley] requested Government assistance to raise capital to fund this bankruptcy". BMO Capital Markets analyst Edward Williams says Harley is more vulnerable to a downturn because it "aggressively went after the lowest-quality borrower" to gain market share against other lenders.
Indeed, between 2003 and 2006, the percentage of HDFS borrowers paying 15% or more in interest—an indicator of credit risk—increased from 8% to 79%, according to company reports. HDFS' share of Harley's operating income also fell to less than $2 million, about 15% of the company total, down from 67% in 2000.
The first sign of danger came early last year, when RBC's Aaron warned investors that loan delinquency rates were rising faster than normal, to more than 54%. While Harley trimmed production in response to slowing sales, it continued to go after marginal borrowers with promotions like 2007's "Stick it to the Man" campaign, which offered zero money down and teaser interest rates as low as 0.9%.
As long as HDFS could package loans and sell them as securities to investors, the strategy worked. In the first quarter of 2008, though, HDFS was forced to retain $754 million in loans no investor would touch. Even fewer buyers stepped forward in the second quarter as loan delinquencies kept rising.
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Topic: HDFS (Read 821 times)