ON THE MONEY

On the Money On the Money

I’ve been composing this column for considerably more than a decade now. In that time-span, history has repeated itself to bracket my endeavours through a pair of fairly cataclysmic events impacting on the motorcycle industry. And, almost accidentally, US biker lifestyle icon Harley-Davidson became a bellwether for those woes.

Let us start with the “credit crunch” global financial crisis in 2008, the aftermath of which was a subject for many of my early columns. At its heart was the international securitisation market’s collapse and subsequent dire distress for the entire banking sector.

Initially, easy mortgage access generated a huge residential real-estate bubble in America, as borrowers expected remorselessly rising house valuations to outpace their repayment burden. Most of this mortgage finance came from lenders who promptly securitised their loan portfolios. They were repackaged into what are variously described as asset-backed or collateralised debt obligation securities. These were then sold on through the banking system, so lenders could recycle the same capital over and over again. A similar principle was applied to point-of-sale consumer credit for other large discretionary purchases.

When the property bubble burst, it transpired that many mortgage-associated securitisation deals, characterised as lucrative lowrisk investment opportunities by vendors, were blatant mis-selling. Their content was actually sub-prime, ripe for default and therefore often effectively worthless once sufficient disgruntled lowincome rednecks had ceased paying and walked away from the

negative equity trap into which they had fallen.

To minimise its own roll-over capital requirements, HarleyDavidson’s POS and dealer inventory funding arm HDFS had been a keen advocate of, and heavily dependent on, securitisation. But it was careful to avoid exposure to toxic sub-prime risk. In 2007, HDFS trousered an operating profit of £179m from this income stream. However, as the financial crisis began to unfold in 2008 and much greater bad-debt provisions were required, HDFS profit sank to just £70m.

There was far worse to come. At the beginning of 2009, the securitisation market vanished altogether. Faced with empty coffers and a forecast annual credit requirement of about £840m to keep trading, HDFS was obliged to take desperate measures. In February that year, it went calling on Harley’s biggest shareholder Davis Selected Advisers and multibillionaire Warren Buffett’s

Berkshire Hathaway investment company for solace. Together, they coughed up £500m, but at an absolutely extortionate 15% interest rate annualised over five years. HDFS also got a hand-out from the US government’s “troubled asset relief programme”.

March 2009 saw HarleyDavidson’s NYSE-listed share price dive to a record low of $7.99, compared to an all-time high of $75.50 in November 2006. In May 2009, acknowledged corporate costcutter Keith Wandell was hastily recruited from outside the company as new-broom chief executive, although immediate respite was beyond his reach. By the year’s end, HDFS had posted a £99m operating loss and Harley as a whole copped a net loss of £46m.

It nevertheless managed to make and ship 223,023 motorcycles, 162,385 of them destined for domestic consumption, during 2009. A considerable quantity were still gathering warehouse or showroom dust in 2010, when shipments were slashed to soak up inventory backlog.

Profligate growth strategies were abandoned in short order, to focus on survival. The Buell sub-brand was sentenced to death and MV Agusta sold back to its erstwhile Italian owner for a pittance (exactly €1). Production and shipments were cut, workers laid off or made redundant, and factories shuttered. Matt Levatich, who had joined Harley-Davidson in 1994 and briefly acted as managing director of MV Agusta after its foolhardy acquisition in 2008, was elevated to chief operating officer, to became Wandell’s principal hatchetman.

In retrospect, Levatich and Wandell did a pretty good job of reviving Harley’s fortunes. By April 2014, its share price had

Faced with empty coffers and a forecast annual credit requirement of about £840m to keep trading, HDFS was obliged to take desperate measures

International Share Prices

USA – INFLATION OUTPACES ESTIMATES

News that US consumer price inflation had defied expectations of a fall and instead risen to an annualised 9.1% in June, from 8.6% in May, was hardly going to calm investment prospects. American energy prices had also climbed to a new high of 41.6% up over the past 12 months too.

Wall Street market indices all finished the week in negative territory. The blue-chip S&P 500 index and S&P’s MidCap 400 respectively closed 0.9% and 0.7% in arrears. The Dow Jones Industrial Average was a more marginal 0.2% down.

Harley-Davidson share movements saw Monday’s 1.8% loss replaced by a 1.4% gain on Tuesday. Then retreats of 0.2% on Wednesday and 2.6% on Thursday were followed by Friday’s 3.7% rise. This still left Harley with only a very marginal advance and analysts are predicting imminent pain from underperforming half-year results due for release shortly.

EUROPE – DOLLAR PARITY

Concerns over global economic health have been strengthening the US dollar and the euro has now sunk in value to virtual parity. This will dramatically raise oil and gas costs for countries forced into greater dependence on imports from the US by their supply stand-off versus Russia. European equity traders ran for cover and eurozone market indices dropped. Frankfurt’s Xetra Dax index closed 1.2% down and the Borsa Italiana MIB in Milan took a harsher 3.9% dive. All four biker-related listings were negative – KTM parent Pierer losing ground for a sixth consecutive week. JAPAN – RISING SUN, FALLING YEN

The assassination of former Japanese prime minister Shinzo Abe caused remarkably little angst among traders on the Tokyo stock exchange. Its Nikkei 225 index put on 1% while the rest of the nation mourned. Burgeoning US currency strength is generating raw nerves, though – the yen having just hit a 24year low against the dollar.

INDIA – THE PRICE AIN’T RIGHT

Mumbai’s BSE Sensex 30 stock index fell by 1.3%, breaking a four-week run of gains. Main driver was apparently the fear of aggressive interest rate hikes by central banks globally, forcing up the cost of overseas borrowing.

However, ongoing domestic retail motorcycle sales growth ensured that bike producer share www.britishdealernews.co.uk