Harvard Case - Harley-Davidson, Inc.: The Reverse Yankee Bond Issue
"Harley-Davidson, Inc.: The Reverse Yankee Bond Issue" Harvard business case study is written by Marc L. Lipson, Robby O'Brien. It deals with the challenges in the field of Finance. The case study is 14 page(s) long and it was first published on : Jul 6, 2023
At Fern Fort University, we recommend that Harley-Davidson proceed with the Reverse Yankee Bond issue, leveraging the favorable market conditions and its strong brand reputation to secure attractive financing terms. This strategy will allow the company to optimize its capital structure, enhance financial flexibility, and pursue growth opportunities while mitigating potential risks through careful risk management and hedging strategies.
2. Background
Harley-Davidson, a renowned motorcycle manufacturer, faced a strategic dilemma in 1987. Despite a strong brand and loyal customer base, the company struggled with profitability and faced intense competition. Seeking to improve its financial position and fund growth initiatives, Harley-Davidson considered a Reverse Yankee Bond issue, a unique financing strategy involving issuing bonds in a foreign currency (Japanese Yen) to tap into a different investor base. This case study explores the feasibility and implications of this unconventional financing strategy.
The main protagonists in this case are:
- Harley-Davidson Management: Seeking to improve the company's financial position and fund growth initiatives.
- Financial Advisors: Providing expertise on the Reverse Yankee Bond issue, assessing its potential benefits and risks.
- Investors: Considering the attractiveness of the bond offering, evaluating its potential returns and risks.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks:
Financial Analysis:
- Financial Statements: Analyzing Harley-Davidson's financial statements reveals its profitability challenges and the need for capital to fuel growth.
- Capital Structure: The Reverse Yankee Bond issue would alter Harley-Davidson's capital structure, potentially lowering its cost of capital and enhancing financial flexibility.
- Risk Management: The analysis should assess the potential risks associated with the Reverse Yankee Bond issue, including currency fluctuations, interest rate changes, and potential investor sentiment shifts.
- Financial Modeling: Building a financial model to assess the impact of the Reverse Yankee Bond issue on key financial metrics like profitability, cash flow, and return on investment is crucial.
International Finance:
- International Business: The Reverse Yankee Bond issue represents a strategic move into the international financial markets, potentially opening new avenues for financing and expanding Harley-Davidson's global reach.
- Foreign Investments: The issuance of bonds in Japanese Yen demonstrates a strategic move towards foreign investments, leveraging the lower interest rates and potential investor appetite in the Japanese market.
- Hedging: Implementing hedging strategies to mitigate currency risk is crucial, considering the potential volatility of the Yen against the US dollar.
Strategy:
- Growth Strategy: The Reverse Yankee Bond issue aims to provide Harley-Davidson with the necessary capital to fund growth initiatives, including product development, market expansion, and potential acquisitions.
- Financial Strategy: This strategy aims to optimize Harley-Davidson's capital structure, enhance financial flexibility, and reduce its cost of capital.
- Economic Forecasting: Analyzing economic forecasts for both the US and Japanese markets is essential to assess the potential impact on interest rates, currency exchange rates, and investor sentiment.
4. Recommendations
Harley-Davidson should proceed with the Reverse Yankee Bond issue, taking the following steps:
- Thorough Due Diligence: Conduct a comprehensive analysis of the Japanese market, including interest rate trends, investor appetite for foreign bonds, and potential currency risks.
- Strategic Partnerships: Partner with reputable Japanese financial institutions to facilitate the bond issuance and manage currency risk through hedging strategies.
- Attractive Offering: Structure the bond offering with competitive interest rates and maturity terms to attract a broad range of investors.
- Transparency and Communication: Clearly communicate the bond offering's terms and risks to potential investors, ensuring transparency and building trust.
- Risk Management: Implement robust risk management strategies to mitigate potential currency fluctuations, interest rate changes, and other market risks.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The Reverse Yankee Bond issue aligns with Harley-Davidson's core competencies in manufacturing and marketing iconic motorcycles while supporting its mission to grow the business and enhance shareholder value.
- External Customers and Internal Clients: The strategy addresses the needs of both external customers (investors seeking attractive returns) and internal clients (Harley-Davidson management seeking capital for growth).
- Competitors: The Reverse Yankee Bond issue allows Harley-Davidson to access a different investor base and potentially lower its cost of capital, providing a competitive advantage in a challenging market.
- Attractiveness ' Quantitative Measures: Financial modeling and analysis should demonstrate the potential benefits of the Reverse Yankee Bond issue, including lower cost of capital, increased financial flexibility, and improved profitability.
6. Conclusion
The Reverse Yankee Bond issue presents a strategic opportunity for Harley-Davidson to access a new source of financing, enhance its financial position, and fund growth initiatives. By carefully considering the risks and implementing appropriate risk management strategies, Harley-Davidson can leverage this unconventional financing strategy to achieve its strategic objectives and enhance shareholder value.
7. Discussion
Alternatives:
- Domestic Bond Issue: Issuing bonds in the US market would be a more traditional approach, but potentially less attractive due to higher interest rates.
- Bank Loan: Securing a bank loan could be an alternative, but may come with restrictive covenants and potentially higher interest rates.
- Equity Offering: Issuing new shares could dilute existing shareholders' ownership but provide additional capital. However, this option may not be desirable in the current market conditions.
Risks and Key Assumptions:
- Currency Fluctuations: The Yen's volatility against the US dollar poses a significant risk, potentially impacting the bond's value and Harley-Davidson's cash flows.
- Interest Rate Changes: Changes in interest rates in Japan could impact the bond's attractiveness to investors and potentially increase Harley-Davidson's financing costs.
- Investor Sentiment: Shifts in investor sentiment towards foreign bonds could impact the bond's price and potentially make it difficult to raise the desired capital.
8. Next Steps
- Due Diligence: Conduct comprehensive due diligence on the Japanese market and potential investors.
- Financial Modeling: Develop a detailed financial model to assess the impact of the Reverse Yankee Bond issue on Harley-Davidson's financial performance.
- Negotiations: Negotiate the bond offering terms with Japanese financial institutions and potential investors.
- Issuance: Proceed with the bond issuance once all necessary approvals are obtained and the terms are finalized.
- Risk Management: Implement a robust risk management framework to mitigate potential currency fluctuations, interest rate changes, and other market risks.
By taking these steps, Harley-Davidson can successfully execute the Reverse Yankee Bond issue, leveraging the favorable market conditions and its strong brand reputation to secure attractive financing terms and achieve its strategic objectives.
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Case Description
Harley-Davidson Inc. (Harley-Davidson), the storied maker of iconic American motorcycles, was on the cusp of issuing its first bond not denominated in US or Canadian dollars-a so-called Reverse Yankee bond issue denominated in euros. Macroeconomic factors suggested that a euro issue could take advantage of the extremely low real rates of return in European markets that resulted from government monetary policies and a weak economy. On the other hand, there were reasons to believe a Harley-Davidson offer might encounter weak demand: the company was struggling with the effects of a trade war between the United States and Europe, its bonds had recently been downgraded, and it had no track record with European offerings. A key question in the case is how to calculate a dollar-equivalent yield on the euro issue so its economic benefit can be determined and compared to a US dollar issue. Using expected spot exchange rates based on inflation (an expected cost of funds) generates a cost of funds lower than the dollar issue, whereas using forward exchange rates based on interest rates (a hedged cost of funds) generates a rate somewhat higher. An analysis of peer company bond offerings suggests that Harley-Davidson is faced with a slightly higher credit spread in Europe, though the spread is not large enough to offset the lower real rate of return associated with a Reverse Yankee bond offering. As is often the case, therefore, the real rate differences across markets cannot be monetized if one hedges borrowing-related currency risk. This may not be a concern for Harley-Davidson, however, as it has substantial sales in Europe. This case can be used in a variety of ways, depending on which elements are emphasized. It has been used successfully at Darden in an MBA-level "International Corporate Finance" class to introduce interest-rate arbitrage and the hedged cost of funds. It could easily be used in a more general course to illustrate parity conditions with some of the
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