1. What is more important, that Harley- Davidson must not report the trust’s receivables and liabilities on its own balance sheet, or the fact that Harley-Davidson now is able to borrow only about 71% of the value of its receivables instead of more than 96% prior to the credit crises of 2008– 2010? Explain.
2. Explain the effects on Harley-Davidson’s financial statements (Exhibits 2– 5).
3. Explain the effects on Harley-Davidson’s market value, including the effects on its ability to increase or even maintain motorcycle credit sales.
Harley-Davidson had long provided motorcycle loans to its customers. It securitized those motorcycle receivables and then sold notes backed by the receivables to institutional investors. Exhibit 1 includes selected portions of Harley- Davidson Motorcycle Trust 2007-3, a typical Harley- Davidson securitization prior to the fi rst quarter of 2008. From the first page of Exhibit 1, the prospectus is an offering to sell $ 782,000,000 of notes, backed by $ 782,000,294.05 of motorcycle receivables (last page of Exhibit 1).1
The bottom portion of the first page of Exhibit 1 describes how investors are protected by credit enhancement. That protection includes a reserve fund into which Harley-Davidson or an affiliate will deposit $ 1,955,000.74 in cash and a yield enhancement fund into which Harley- Davidson or an affiliate will deposit $ 27,386,672.85 in cash. That $ 29,341,673.59 of cash, plus the $ 782,000,294.05 of motorcycle receivables, will provide investors with a 3.75% cushion above the principal value of the notes ($ 782,000,000). Investors are also protected by an excess interest rate spread. The trust paid an average interest rate of slightly above 6% on the notes it issued (first page, Exhibit 1) and the trust received an average interest rate of 10.748% on the motor-cycle receivables it owned.