Harley-Davidson filed papers today with the SEC disclosing that the company has bought back $297 million in papers (essentially paying off a loan) from Davis Selected Advisers, L.P to the tune of $380.8 million. Taking the loan amount at 15% interest, Harley-Davidson borrowed roughly $600 million from Davis Select and Warren Buffett ($300 million each, despite what other blogs seem to think) back in February of 2009. This announcement marks the first step Harley-Davidson has taken in repaying that debt, and with the added $100 million in interest payments, it’s easy to understand why.
With the cash infusion by Davis Select and Berkshire Hathaway seen at the time as a vote of confidence in the Milwaukee brand, the cost of taking the loan levied a heavy burden on Harley-Davidson’s balance sheet. In just nearly two years’ time, this loan has accrued just under $200 million in interest; and rightfully so, Harley is seeing the wisdom in paying off that amount in partial today.
At the time, the $600 million amount coincided with the yearly burn rate (how much money the company uses in a year) of Harley-Davidson. With already roughly $600 million in cash reserves, Harley’s loan from Davis Select and Berkshire Hathaway represented the company’s new-found financial ability to do two years worth of operations without making any money. With that possibility nearly coming true, Harley-Davidson’s repayment of this loan could be a sign that the company feels confident in its ability to stay afloat in the coming markets.
Despite today’s transaction, Davis Select remains a shareholder in Harley-Davidson, owning over 10% of the company’s stock. Meanwhile Harley-Davidson still owes Warren Buffett’s Berkshire Hathaway its $300 million plus interest, which in February 2011 will close in on the $400 million mark in total debt. Harley-Davidson stock shot up about a dollar per share after the release of the announcement, mimicking the market openings
Full Disclosure: The author of this article has a financial interest in the Berkshire Hathaway company.