> Warren Buffett Blog: Berkshire made $150 million from loan to Harley Davidson

Monday, July 11, 2016

Berkshire made $150 million from loan to Harley Davidson

In 2009 during the market crisis, Berkshire Hathaway lent Wisconsin-based Harley-Davidson $303 million over five years by buying unsecured notes issued by the manufacturer — essentially, a loan. The maker of street bikes was in a cash crunch as the recession deepened.

The interest rate charged by Berkshire Chairman and Chief Executive Buffett was a juicy 15 percent. While the exact repayment terms and schedules aren’t known, on a yearly lump payment at a standard interest-and-principal paydown, the loan would have yielded Berkshire lending income of about $150 million when it was all over.

But what if Berkshire had insisted upon what Wall Street calls an “equity kicker”? That means shares in the company, maybe even preferred ones such as the ones Berkshire owns in Bank of America that come with a special dividend and the right to convert to common shares at an enormous profit on a later date.

While the prospect is worth considering, Buffett investors, scholars and stock market observers agree on one thing: Berkshire’s profit on the $300 million Harley-Davidson loan is high cotton.

“I do not believe Buffett is having any second thoughts in his arrangement with Harley-Davidson,” said David Kass, a Berkshire shareholder and business professor at the University of Maryland. “He is probably very pleased with his 15 percent loan, which he perceived as having very little risk.”