OREANDA-NEWS. Fitch Ratings expects to assign an 'A' rating to Harley-Davidson Financial Services, Inc.'s (HDFS) proposed issuance of at least $1 billion in aggregate of senior unsecured medium term notes (MTN). The fixed rate of interest will be determined at the time of issuance. HDFS is the captive finance subsidiary of Harley-Davidson, Inc. (HOG, 'A'/Outlook Stable), a manufacturer of motorcycles.

KEY RATING DRIVERS - IDR and SENIOR DEBT
HDFS' ratings reflect its close operating relationship and support agreement with HOG, under which the parent must maintain HDFS' fixed-charge coverage at 1.25x and its minimum net worth at $40 million. The ratings of HDFS and HOG are linked, as Fitch believes that the finance company is a core subsidiary of the parent as demonstrated by the explicit and implicit level of support between the two entities.

HDFS' operating performance has been relatively stable. The company reported YTD operating income of $219.3 million through 3Q15, relatively consistent compared to $215.4 million reported through YTD 3Q14. This was driven primarily by portfolio growth, partially offset by lower yields due to increased competition. Total retail delinquencies (30+ days past due receivables) as a percentage of total retail receivables increased slightly to 3.16% at 3Q15 compared to 3.00% a year earlier. Managed retail losses as a percentage of average retail receivables were also modestly higher at 1.19% through year-to-date 3Q15 compared to 1.08% through year-to-date 3Q14.

While operating performance for 2015 is likely to be in line with 2014, Fitch expects some margin erosion, which will likely continue into 2016. This is due to lower yields driven by increased competition in the prime segment, rising borrowing costs and a normalizing credit environment.

As of the quarter ended Sept. 27, 2015, HDFS had $1.37 billion of liquidity, which included approximately $405.2 million of cash and cash equivalents and $960 million of availability under its global credit and asset-backed conduit facilities. HDFS' debt maturities are well laddered, with manageable maturities between March 2016 and 2020. Overall, Fitch believes HDFS' funding profile has improved markedly since the financial crisis, evidenced by the lengthening of debt maturities, reduced reliance on commercial paper and increased amount of unsecured funding. As of Sept. 27, 2015, unsecured debt represented approximately 66% of total term debt, which is viewed favorably by Fitch. Fitch believes HDFS has sufficient liquidity to meet upcoming debt maturities and fund new motorcycle receivables.

Leverage, defined as total debt divided by tangible equity was 6.15x at 3Q15 compared to 5.79x at 3Q14. Leverage increased as the company increased debt to fund growth in its receivables portfolio, which grew approximately 10.1% in the first nine months of 2015. HDFS' historical leverage has ranged been between 5x - 7x debt/tangible equity, which is moderately lower than captive finance company peers but higher than many stand-alone finance companies. Fitch expects HDFS' leverage after the issuance to remain above this historical range in the short-term but to conform later in the year following expected debt maturities.

RATING SENSITIVITIES - IDR AND SENIOR DEBT

HDFS' ratings and Rating Outlook are linked to those of its parent. However, negative rating action could also be driven by a change in the perceived relationship between HOG and HDFS. Additionally, a change in profitability leading to operating losses, meaningful deterioration in asset quality, material change in leverage, difficulty in accessing long-term funding for new originations and/or a significant increase in reliance on secured debt or commercial paper could also yield negative rating action. Positive rating momentum for HDFS would be limited by Fitch's view of HOG's credit profile. Fitch cannot envision a scenario where the captive would be rated higher than its parent.

Fitch has assigned the following expected rating:

Harley-Davidson Financial Services, Inc.
--Senior unsecured notes 'A(EXP)'.

Fitch currently rates HDFS and its subsidiary HDFC as follows:

Harley-Davidson Financial Services, Inc.
--Long-term IDR at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper rating at 'F1';

Harley-Davidson Funding Corp.
--Senior unsecured rating at 'A'.

The Rating Outlook is Stable.