Warren Buffett loaned $300 million to Harley-Davidson during the financial crisis. Here's the story of how he helped the motorcycle maker.
Warren Buffett motorcycle
Warren Buffett loaned Harley-Davidson around $ 300 million during the financial crisis.
"It was the bridge we needed to get through a difficult time," said the motorcycle manufacturer's chief financial officer in 2014.
Buffett's Berkshire Hathaway was likely to make a profit of around $ 150 million from the five-year loan, but could have earned more than $ 1 billion if he had invested $ 300 million in Harley-Davidson shares over the same period.
"I knew enough to lend them money. I didn't know enough to buy equity," Buffett later explained.
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Warren Buffett loaned Harley-Davidson just over $ 300 million in February 2009 when the famous motorcycle manufacturer was hit by a double blow of weaker demand and a money crisis during the financial crisis.
A few weeks earlier, Harley-Davidson had unveiled a three-part plan to weather the downturn: invest in its brand, cut costs, and find the money to cover the $ 1 billion annual finance department cost.
The first two elements meant that younger and more diverse drivers were addressed. Closure of plants, merging of companies and outsourcing of part of the distribution; and layoff of around 1,100 employees or around 12% of the workforce.
However, crippled credit markets made it difficult to meet the third part of the plan. The company eventually decided to borrow from its largest shareholder, Davis Selected Advisers, and Buffett's Berkshire Hathaway.
The couple together lent him $ 5 million for five years at a high 15% annual rate.
"It was the bridge we needed to get through a difficult time," said Harley-Davidson chief financial officer John Olin, 2014 to Fortune Magazine.
The group needed the money to continue providing funding to motorcycle dealers and retail customers and to keep their production lines running, Olin continued.
The high yield loan is the only way to borrow money without giving up a stake in the company, he added.
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"I knew enough to lend them money"
Buffett closed a number of similar deals during the crisis. For example, in the fall of 2008, he invested $ 5 billion in Goldman Sachs and $ 3 billion in General Electric.
"There was practically no credit," said Alice Schroeder about this time in "The Snowball: Warren Buffett and the Business of Life".
"Buffett made loans at interest rates that in some cases bordered on usury."
The famous investor also showed his ruthlessness by refusing Harley-Davidson's early repayment request for his loan. Berkshire said it was happy with the terms, the company told Fortune.
Buffett likely made a $ 150 million gain on the loan. However, he could have raised more than $ 1 billion by instead investing $ 300 million in Harley-Davidson shares, as their value more than quadrupled between 2009 and 2014.
A shareholder asked Buffett why he chose debt instead of equity at the 2010 Berkshire meeting.
"I knew enough to lend them money. I didn't know enough to buy equity," replied the investor.
"I like a store where your customers tattoo your name on their chest," he continued. "But to find out the economic value of it ... I'm not sure I would even go out and interview the guys I would learn a lot from."
Buffett granted the loan because he was confident at the time that "a) Harley-Davidson would not go out of business and b) 15% would look damn attractive."
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Keep it simple
Berkshire made "very good money" by making a simple judgment that the company would not go bankrupt and lending it money, Buffett said at the meeting.
Buying his shares would raise more difficult questions, such as whether the motorcycle market would shrink or Harley-Davidson's margins would suffer from the downturn, he added.
Crisis deals like the Harley-Davidson loan also showed how Berkshire's policy of holding cash in the bank and never buying all-in stocks can pay off, Buffett argued.
"We felt very good where this philosophy left us," he said. "We could actually do things at a time when most people were paralyzed, and we will continue to do so."
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