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Friday, January 27, 2023

Warren Buffett lent Harley-Davidson $300 million during the financial crisis. Here’s a look at how he helped the motorcycle manufacturer.

  • Warren Buffett lent about $300 million to Harley-Davidson during the financial crisis.
  • The motorcycle manufacturer needed cash in the face of lower demand and depleted liquidity.

Warren Buffett lent Harley-Davidson just over $300 million in February 2009, as the famed motorcycle maker was reeling from a double whammy of weaker demand and a cash crunch during the financial crisis.

A few weeks earlier, Harley-Davidson had laid out a three-part plan to weather the recession. He focused on investing in his brand, cutting expenses and finding the money to cover the roughly $1 billion annual costs of his financing division.

The first two elements translated into targeting younger, more diverse riders; closing plants, combining operations and outsourcing some distribution; and lay off about 1,100 employees or about 12% of its workforce.

Grieved credit markets, however, made it difficult to meet the third part of the plan. The company ultimately decided to borrow from its largest shareholder, Davis Selected Advisers, as well as Buffett’s Berkshire Hathaway.

The couple effectively loaned him a combined $600 million for five years at an annual interest rate of 15%.

“It was the bridge we needed to get us through a difficult time,” Harley-Davidson’s chief financial officer John Olin told Fortune in 2014.

The manufacturer needed the cash to continue offering financing to motorcycle dealers and retail customers, and to keep its production lines running, Olin continued.

The high-interest loan was his only option to borrow money without giving up a stake in the company, he added.

‘I knew enough to lend them money’

Buffett struck a bunch of similar deals during the crisis. For example, he invested $5 billion in Goldman Sachs and $3 billion in General Electric in the fall of 2008.

“Credit remained virtually non-existent,” Alice Schroeder said of that period in “The Snowball: Warren Buffett and the Business of Life.”

Schroeder added: “Buffett lent at interest rates that in some cases bordered on usury.”

The famous investor also showed his cruelty when he refused Harley-Davidson’s request to pay off his loan early. Berkshire said it was happy with the agreed terms, the company told Fortune.

Buffett probably made a solid profit of $150 million on the loan. However, he could have raised more than $1 billion by investing $300 million in Harley-Davidson stock, as his stock more than quadrupled between 2009 and 2014.

A shareholder asked Buffett why he opted for debt over equity at Berkshire’s 2010 annual meeting.

“I knew enough to lend them money; I didn’t know enough to buy shares,” the investor replied.

“I like a business where your customers get your name tattooed on their chests,” he continued. “But figuring out the economic value of that…I’m not sure even going out and questioning those guys would learn a lot from them.”

Buffett added that he made the loan because he was certain at the time that “a) Harley-Davidson wasn’t going to go out of business, and that b) 15% would look pretty attractive.”

keeping it simple

Berkshire made “very good money” simply by determining that Harley-Davidson would not go bankrupt and lending it much-needed money, Buffett said at the meeting.

Buying its shares would have raised more difficult questions, such as whether the motorcycle market would shrink or the company’s margins would suffer from the economic downturn, he added.

The Harley-Davidson loan and other crisis-era deals showed how Berkshire’s policy of keeping some cash in the bank and never going all-in on stocks can pay off, Buffett said.

“We feel very good about where that philosophy left us,” he said. “In fact, we could do things at a time when most people were paralyzed, and we’ll continue to do it that way.”

Read more: David Rubenstein sees Warren Buffett as the ultimate investor. Carlyle’s Billionaire outlines the 12 traits and habits that are critical to Buffett’s success.

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