Harley-Davidson Credit Corp. has filed a prospectus detailing a $300 million notes issue backed by new and used motorcycle loans.
The bonds are being issued through Harley-Davidson Motorcycle Trust 2016-A in a five-tranche notes structure, according to the filing with the Securities and Exchange Commission on Tuesday. The notes are backed by a pool of loans with a principal balance of $450 million.
The capital stack includes a $56.7 million series of one-year money market Class A-1 notes that the company states will receive preliminary ‘P-1’ and ‘A-1’ ratings from Moody’s Investors Service and Standard & Poor’s, respectively.
An issue of $96 million in both Class A-2 and A-3 notes, and a $40.73 million slice of Class A-4 notes are each expected to garner triple-A ratings from both agencies, while a $10.75 million Class B tranche will be rated ‘Baa2’ by Moody’s and ‘BBB’ from S&P. Each of the longer-term notes has varying maturity dates between 2019 and 2024.
The notes will be supported by credit enhancement features including overcollateralization, a reserve fund and excess cash flow. The reserve fund totals over $754,000, according to the prospectus. The pool is divided between 76% new loans and 23.71% for used motorcycles.
Harley-Davidson is using exclusively fixed-rate tranches in 2016-A, unlike the company’s previous $500 million transaction in April 2015 in which floating-rate instruments were included.
JPMorgan and Wells Fargo are the underwriters on the transaction.
The loans were sold by the Nevada-based HDCC, which is a subsidiary of Harley-Davidson Financial Services, the financing division for the motorcycle manufacturer. The contracts are for up to 84 months for prime customers with average FICO scores of 751. All of the contracts in the pool are from customers with FICO scores of at least 670.
HDCC has securitized $23.9 billion in new and used motorcycle loans for Harley-Davidson since 1994, in both private and public sales. The company has securitized $4.6 billion in contracts since 2011.
HDCC at year’s end 2015 had 483,359 retail contracts for motorcycles, aircraft and marine products in its portfolio, with a principal balance that has grown to $5.55 billion from $4.7 billion in 2011
The net losses in the portfolio have continued to decline, nearly doubling since 2012 to 1.97%, compared to 1.17% in 2011 (an arc that includes a dip to 0.76% in 2011). Last October, Moody’s issued a report stating it expected loan losses to continue rising in Harley-Davidson’s ABS pools due to declining motorcycle resale values that have led to higher loss severities in defaulted loans.
The ratings agency said it expected the slide to continue as new motorcycles continue to flood the market. In addition to the continuing increase in Harley-Davidson production, lower-cost Japanese competitors are selling higher volumes of new bikes as well, the report noted.