- Warren Buffett loaned around $300 million to Harley-Davidson during the financial crisis.
- The motorcycle maker needed cash in the face of softer demand and drying up liquidity.
- Buffett made about $150 million in five years, but could have raked in $1 billion by owning the stock.
Warren Buffett lent just over $300 million to Harley-Davidson in February 2009, as the venerable motorcycle maker reeled from the one-two punch of weaker demand and a cash crunch during the financial crisis.
A few weeks earlier, Harley-Davidson had unveiled a three-pronged plan to weather the downturn. It focused on investing in the brand, cutting expenses and finding money to cover the financing division’s roughly $1 billion in annual costs.
The first two elements translated into targeting younger and more diverse riders; closing facilities, combining operations and outsourcing certain distribution; and laying off about 1,100 employees or about 12% of the workforce.
Paralyzed credit markets, however, made it difficult to fulfill 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 actually loaned it a total of $600 million over five years at a hefty 15% annual interest rate.
“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 money to continue offering financing to motorcycle dealers and retail customers, and to keep production lines running, Olin continued.
The high-interest loan was the only opportunity to borrow money without giving up an ownership stake in the company, he added.
“I knew enough to lend them money”
Buffett made 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 nonexistent,” 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 recklessness when he refused Harley-Davidson’s request to repay the loan early. Berkshire said it was satisfied with the agreed terms, the company told Fortune.
Buffett likely made a solid profit of $150 million from the loan. Still, he could have raked in over $1 billion by investing $300 million in Harley-Davidson stock instead, as the stock more than quadrupled in value between 2009 and 2014.
A shareholder asked Buffett why he chose debt over equity during Berkshire’s 2010 annual meeting.
“I knew enough to lend them money; I didn’t know enough to buy the equity,” the investor replied.
“I like a business where your customers tattoo your name on their chest,” he continued. “But figuring out the financial value of it … I’m not sure I’d even go out and question those guys I’d learn a lot from.”
Buffett added that he made the loan because he felt confident at the time that “a) Harley-Davidson wasn’t going out of business, and that b) 15% was going to look pretty damn attractive.”
Keeps it simple
Berkshire made “very good money” by simply figuring out that Harley-Davidson wouldn’t go broke and lending it much-needed money, Buffett said at the meeting.
Buying the stock would have asked tougher questions like 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 deals showed how Berkshire’s policy of keeping a little money in the bank and never going all-in on stocks can pay off, Buffett noted.
“We felt really good about where that philosophy left us,” he said. “We were actually able to do things at a time when most people were paralyzed, and we want to continue to run it that way.”
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