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"Blue Horseshoe loves Anacot Steel."
Once upon a time, these famous words from the movie Wall Street sent shares of a fictional steelmaker skyrocketing -- but they ain't a patch on what happened when the real Wall Street learned that Warren Buffett loves Harley-Davidson (NYSE: HOG ) .
In what would have been a humdrum announcement any other day of the week, for any other company, with any other financier, yesterday, a cash-strapped Harley announced the sale of $600 million in unsecured debt to a pair of Wall Street legends. What set it apart from other financings, though, were three things:
- The interest rate paid on the debt: 15% per annum.
- The market's reaction to the news -- Harley shares leapt 16%.
- And most importantly, the people doing the buying.
Splitting the paper were Davis Selected Advisers, an investment fund run by scions of famed investor and Motley Fool hero, Shelby Davis, Sr., and Warren Buffett's Berkshire Hathaway (NYSE: BRK-B ) . Each firm picked up $300 million in debt, making the deal (from Berkshire's perspective) about as big a deal as its November investment in USG (NYSE: USG ) , but significantly smaller than Berkshire's higher profile moves into General Electric (NYSE: GE ) and Goldman Sachs (NYSE: GE ) equity.
Now, at first glance, you might not think that this would be the kind of news to move a stock 16% in a day. Taking one look at the deal, Moody's (NYSE: MCO ) downgraded Harley-Davidson Financial Services' long-term creditworthiness a grade from A1to A2. UBS (NYSE: UBS ) soon pointed out that the added cost of this financing will slice about $0.18 per share from Harley's fiscal 2009 profits.
And yet, the fact that everything about the deal seems negative to Harley makes the stock's reaction to the news all the more interesting. What, pray tell, could investors see in this news that's edifying?
First and most immediately, we see Harley getting a new lease on life. $600 million in new cash, plus the nearly $600 million that the hogmeister already has stashed in the bank, means that Harley can continue to burn cash at the same rate in 2009 as it did in 2008, and still not quite run out.
But as reassuring as this news is, I rather suspect that the psychological factor played the more important part. Neither Buffett nor Davis got where they are today by pouring good money into bad companies immediately prior to a bankruptcy. Investors probably think that if Buffett and Davis believe Harley will survive to repay its debts, then it will.
I think they're right. But I also (still) think that the dividend is toast. Why is that? Read on and find out: