Warren Buffett loaned about $300 million to Harley-Davidson during the financial crisis.
The motorcycle maker needed cash in the face of softer demand and liquidity drying up.
Buffett made about $150 million in five years, but could have raked in $1 billion owning the stock.
Warren Buffett loaned just over $300 million to Harley-Davidson in February 2009, when the storied motorcycle maker was reeling from a one-two punch of weaker demand and a cash crunch during the financial crisis.
A few weeks earlier, Harley-Davidson had unveiled a three-part plan to weather the downturn. It centered on investing in its brand, cutting expenses, and finding the money to cover its financing division’s roughly $1 billion in yearly costs.
The first two elements translated into targeting younger and more diverse riders; closing plants, combining operations, and outsourcing some distribution; and laying off about 1,100 employees or about 12% of its workforce.
However, paralyzed credit markets made it tricky 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 pair effectively loaned it a combined $600 million for five years at a hefty 15% annual interest rate.
“It was the bridge we needed to get us through a rough time,” Harley-Davidson’s finance chief, John Olin, told Fortune in 2014.
The manufacturer needed the cash to continue offering financing to motorcycle dealerships and retail customers, and to keep its production lines rolling, Olin continued.
The high-interest loan was its only option to borrow money without giving up a stake in the company, he added.
‘I knew enough to lend them money’
Buffett struck 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 about that period in “The Snowball: Warren Buffett and the Business of Life.”
Schroeder added: “Buffett lent at interest rates that in some instances bordered on usurious.”
The famed investor also displayed his ruthlessness when he refused Harley-Davidson’s request to repay its loan early. Berkshire said it was happy with the agreed terms, the company told Fortune.
Buffett likely netted a solid $150 million in profit from the loan. Yet he could have raked in over $1 billion by investing $300 million in Harley-Davidson stock instead, as its shares more than quadrupled in value between 2009 and 2014.
A shareholder asked Buffett why he opted for debt instead of equity during Berkshire’s annual meeting in 2010.
“I knew enough to lend them money; I didn’t know enough to buy the equity,” the investor replied.
“I kind of like a business where your customers tattoo your name on their chest,” he continued. “But figuring out the economic value of that … I’m not sure even going out and questioning those guys I’d learn much from them.”
Buffett added that he made the loan because he felt confident at the time that “a) Harley-Davidson was not going out of business, and that b) 15% was going to look pretty damned attractive.”
Keeping it simple
Berkshire made “very good money” by simply determining Harley-Davidson wouldn’t go broke and lending it some much-needed cash, Buffett said at the meeting.
Buying its stock would have posed tougher questions such as 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-era deals showcased how Berkshire’s policy of keeping some cash in the bank and never going all in on stocks can pay off handsomely, Buffett noted.
“We felt very good about where that philosophy left us,” he said. “We actually could do things at a time when most people were paralyzed, and we’ll keep running it that way.”
Read more: David Rubenstein views Warren Buffett as the ultimate investor. The Carlyle billionaire outlines the 12 traits and habits that are critical to Buffett’s success.
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