Harley-Davidson was highly profitable, had one
of the world’s most valuable brands, and by the end of 2008 had repurchased
$4.7 billion of its common stock. Harley-Davidson
Financial Services made low-risk loans to Harley retail customers and then sold
those receivables to Harley-Davidson Motorcycle Trust. The Motorcycle Trust sold notes backed by the
motorcycle receivables to institutional investors. Harley-Davidson’s highly loyal customers
rarely defaulted, so the Motorcycle Trust sold notes equal to about 93-96% of
the face value of the receivables collateralizing the notes.
The subprime securitization market collapsed
in late 2007 and entire securitization market effectively closed in the second
quarter of 2008. From then through June
30, 2009, the Motorcycle Trust was unable to sell notes backed by
Harley-Davidson receivables. As a
result, “Finance receivables held for sale” increased from $781 million on
December 31, 2008, to $2.444 billion on December 31, 2009. To finance those receivables, Harley-Davidson
increased its debt by over $2 billion.
Harley-Davidson’s pension and retiree health
care funds also suffered major losses.
Possibly because of Harley’s weaker financial condition, its reserve
accounts for items such as receivables and warranties seemed far less
conservative at the end of 2008 than at the end of 2007.
Does Harley-Davidson have adequate
allowance/reserve balances in : (a) warranty and safety recall liability;
(b) accounts receivable; (c) finance receivables held for investment; (d)
finance receivables held for sale, and (e) inventories? Are these
balances more or less adequate than in the past? Explain in a paragraph.