Asset-Backed Financing

12 Months Ended

Dec. 31, 2014

The Company participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. The Company treats these transactions as secured borrowings because assets are either transferred to consolidated VIEs or the Company maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860. See Note 1 for more information on the Company's accounting for asset-backed financings and VIEs.

The following table shows the assets and liabilities related to the Company's asset-backed financings that were included in its financial statements at December 31 (in thousands):



	2014
	Finance receivables		Allowance for credit losses			Restricted cash		Other assets		Total assets		Asset-backed debt
On-balance sheet assets and liabilities
Consolidated VIEs
Term asset-backed securitizations	$	1,458,602	$	(32,156	)	$	110,017	$	2,987	$	1,539,450	$	1,271,533
Asset-backed U.S. commercial paper conduit facility	—		—			—		422		422		—
Unconsolidated VIEs
Asset-backed Canadian commercial paper conduit facility	185,099		(2,965		)	12,035		262		194,431		166,912
Total	$	1,643,701	$	(35,121	)	$	122,052	$	3,671	$	1,734,303	$	1,438,445

	2013
	Finance receivables		Allowance for credit losses			Restricted cash		Other assets		Total assets		Asset-backed debt
On-balance sheet assets and liabilities
Consolidated VIEs
Term asset-backed securitizations	$	1,569,118	$	(31,778	)	$	133,053	$	3,720	$	1,674,113	$	1,256,632
Asset-backed U.S. commercial paper conduit facility	—		—			—		429		429		—
Unconsolidated VIEs
Asset-backed Canadian commercial paper conduit facility	204,092		(3,361		)	11,754		589		213,074		174,241
Total	$	1,773,210	$	(35,139	)	$	144,807	$	4,738	$	1,887,616	$	1,430,873

Term Asset-Backed Securitization VIEs

The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transactions and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. Restricted cash balances held by the SPEs are used only to support the securitizations.

In 2014 and 2013, the Company transferred $924.9 million and $680.6 million, respectively, of U.S. retail motorcycle finance receivables to two separate SPEs. The SPEs in turn issued $850.0 million and $650.0 million, respectively, of secured notes. At December 31, 2014, the Company's consolidated balance sheet included outstanding balances related to the following secured notes with the related maturity dates and interest rates (in thousands):



Issue Date	Principal Amount at Date of Issuance	Weighted-Average Rate at Date of Issuance	Contractual Maturity Date
April 2014	$850,000	0.66%	April 2015 - October 2021
April 2013	$650,000	0.57%	May 2014 - December 2020
July 2012	$675,306	0.59%	August 2013 - June 2018
November 2011	$513,300	0.88%	November 2012 - February 2018
August 2011	$573,380	0.76%	September 2012 - August 2017

In addition to the above transactions, during 2012 the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of the December 2009, August 2011 and November 2011 term asset-backed securitization transactions. These notes were sold at a premium. During 2013, the notes related to the December 2009 term asset-backed securitization transaction were repaid. The August 2011 and November 2011 notes have contractual maturities ranging from January 2019 to April 2019.

Outstanding balances related to the following secured notes were included in the Company's consolidated balance sheet at December 31, 2013 and the Company completed repayment of those balances during 2014 (in thousands):



Issue Date	Principal Amount at Date of Issuance	Weighted-Average Rate at Date of Issuance	Contractual Maturity Date

November 2010	$600,000	1.05%	December 2011 - April 2018

For the year ended December 31, 2014 and 2013, the SPEs recorded interest expense on the secured notes of $13.5 million and $14.5 million, respectively, which is included in financial services interest expense. The weighted average interest rate of the outstanding term asset-backed securitization transactions was 0.94% and 0.99% at December 31, 2014 and 2013, respectively.

Asset-Backed U.S. Commercial Paper Conduit Facility VIE

In September 2014, the Company amended and restated its facility (U.S. Conduit) with a third-party bank sponsored asset-backed commercial paper conduit, which provides for a total aggregate commitment of up to $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral. Under the facility, the Company may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits.

The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates plus a program fee based on outstanding principal, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the U.S. Conduit has an expiration date of October 30, 2015.

The SPE had no borrowings outstanding under the U.S. Conduit at December 31, 2014 or 2013; therefore, these assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment of $600.0 million.

For the years ended December 31, 2014 and 2013, the SPE recorded interest expense of $1.1 million and $1.2 million, respectively, related to the unused portion of the total aggregate commitment of $600.0 million. Interest expense on the U.S. Conduit is included in financial services interest expense. There was no weighted average interest rate at December 31, 2014 or 2013 as the Company had no outstanding borrowings under the U.S. Conduit during 2014 or 2013.

Asset-Backed Canadian Commercial Paper Conduit Facility

In June 2014, the Company amended its revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables from the Company for proceeds up to C$200 million. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the Canadian Conduit expires on June 30, 2015. The contractual maturity of the debt is approximately 5 years.

During 2014 and 2013, the Company transferred $97.1 million and $101.1 million, respectively, of Canadian retail motorcycle finance receivables for proceeds of $85.0 million and $88.6 million, respectively. This transaction is treated as a secured borrowing, and the transferred assets are restricted as collateral for payment of the debt.

For the years ended December 31, 2014 and 2013, the Company recorded interest expense of $3.5 million and $3.4 million, respectively, on the secured notes. Interest expense on the Canadian Conduit is included in financial services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 2.03% at both December 31, 2014 and 2013.

As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, is $27.5 million at December 31, 2014. The maximum exposure is not an indication of the Company's expected loss exposure.

Debt

Debt with contractual terms less than one year is generally classified as short-term debt and consisted of the following as of December 31 (in thousands):



	2014		2013
Unsecured commercial paper	$	731,786	$	666,317

Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following as of December 31 (in thousands):



	2014			2013
Secured debt
Asset-backed Canadian commercial paper conduit facility	$	166,912		$	174,241
Term asset-backed securitization debt	1,271,533			1,256,632
Unsecured notes
5.75% Medium-term notes due in 2014 ($500.0 million par value)	—			499,866
1.15% Medium-term notes due in 2015 ($600.0 million par value)	599,817			599,543
3.88% Medium-term notes due in 2016 ($450.0 million par value)	449,937			449,883
2.70% Medium-term notes due in 2017 ($400.0 million par value)	399,963			399,946
1.55% Medium-term notes due in 2017 ($400.0 million par value)	399,464			—
6.80% Medium-term notes due in 2018 ($888.0 million par value)	887,381			909,742
2.40% Medium-term notes due in 2019 ($600.0 million par value)	597,836			—
15.00% Senior unsecured notes due in 2014 ($600.0 million par value)	—			303,000
Gross long-term debt	4,772,843			4,592,853
Less: current portion of long-term debt	(1,011,315		)	(1,176,140		)
Long-term debt	$	3,761,528		$	3,416,713

Commercial paper maturities may range up to 365 days from the issuance date. The weighted-average interest rate of outstanding commercial paper balances was 0.30% and 0.23% at December 31, 2014 and 2013, respectively.

On April 7, 2014, the Company entered into a new $675.0 million five-year credit facility to refinance and replace a $675 million four-year credit facility that was due to mature in April 2015. The new five-year credit facility matures in April 2019. The Company also has a $675.0 million five-year credit facility which matures in April 2017. The new five-year credit facility and the existing five-year credit facility (together, the Global Credit Facilities) bear interest at various variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based upon the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support the Company's unsecured commercial paper program. At December 31, 2014 and 2013, the Company had no outstanding borrowings under the Global Credit Facilities.

In September 2014, the Company amended and restated its revolving facility (U.S. Conduit) with an asset-backed U.S. commercial paper conduit which provides for a total aggregate commitment of $600.0 million. At December 31, 2014 and 2013, the Company had no outstanding borrowings under the U.S. Conduit. Refer to Note 6 for further discussion on the U.S. Conduit.

During 2014, the Company issued $850.0 million of secured notes through one term asset-backed securitization transaction. During 2013, the Company issued $650.0 million of secured notes through one term asset-backed securitization transaction. Additionally, during 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of the December 2009, August 2011, and November 2011 term asset-backed securitization transactions. These notes were sold at a premium, and at December 31, 2014 and 2013, the unaccreted premium associated with these notes was $0.2 million and $0.5 million, respectively. Approximately $366.9 million and $334.6 million of the obligations under the secured notes were classified as current at December 31, 2014 and 2013, respectively, based on the contractual maturities of the restricted finance receivables. The term-asset backed securitization transactions are further discussed in Note 6.

In September 2014, the Company issued $600 million of medium-term notes which mature in September 2019 and have an annual interest rate of 2.40%. In November 2014, the Company issued $400 million of medium-term notes which mature in November 2017 and have an annual interest rate of 1.55%. There were no medium-term note issuances during 2013. All of the Company's medium-term notes (collectively, the Notes) provide for semi-annual interest payments and principal due at maturity. Unamortized discounts on the Notes reduced the balance by $3.6 million and $1.5 million at December 31, 2014 and 2013, respectively.

During 2014, 2013, and 2012, the Company repurchased an aggregate of $22.6 million, $23.0 million, and $16.6 million respectively, of its 6.80% medium-term notes which mature in June 2018. As a result, the Company recognized in financial services interest expense $3.9 million, $4.9 million, and $4.3 million of loss on extinguishment of debt, respectively, which included unamortized discounts and fees. During December 2014, $500.0 million of 5.75% medium-term notes matured, and the principal and accrued interest were paid in full. During December 2013, $400.0 million of the 5.25% medium-term notes matured, and the principal and accrued interest were paid in full.

In February 2009, the Company issued $600.0 million of senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. The senior unsecured notes mature in February 2014 and had an annual interest rate of 15%. During the fourth quarter of 2010, the Company repurchased $297.0 million of the $600.0 million senior unsecured notes and the remaining $303.0 million was repaid at maturity in February 2014.

HDFS and the Company are subject to various operating and financial covenants related to the Global Credit Facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.

The operational covenants limit the Company’s and HDFS’ ability to:


•	assume or incur certain liens;


•	participate in certain mergers, consolidations, liquidations or dissolutions; and


•	purchase or hold margin stock.

Under the current financial covenants of the Global Credit Facilities, the consolidated debt to equity ratio of HDFS cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and equity, in each case excluding the debt of HDFS and its subsidiaries, cannot exceed 0.65 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.

At December 31, 2014 and 2013, HDFS and the Company remained in compliance with all of these covenants.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details