Kass: Harley Hogs Feed at the Subprime Trough

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Judging by the commentary and the virtual invulnerability of worldwide equity prices, most see only a speed bump in the recent subprime scare. There is still a general belief on the part of the investment community that the mess is a containable fluke.

I have stressed the likelihood of a subprime contagion. After all, subprime is subprime and credit is correlated. Lower-quality, more-levered lending (with less collateral) is not confined to consumer loans, credit cards, homes, recreational vehicles and autos -- as investors might soon find out.

Even motorcycle (loans) are hitting potholes!

Indeed, it appears growing credit losses and delinquencies are beginning to render Harley-Davidson's (HOG Quote) motorcycle loans, well, increasingly like hogs.

Thirty-day delinquencies (and loss trends) in Harley-Davidson's receivables book offer a clear picture that credit-quality issues are broadening as HOG's receivables experience has begun to trace a pattern of deterioration that we first began to see in subprime mortgage loans during the first half of 2006.

Harley-Davidson's 30-Day Delinquencies
4Q2006	5.18%
3Q2006	4.46%
2Q2006	3.61%
1Q2006	3.69%
4Q2005	4.83%
3Q2005	4.07%
2Q2005	3.66%
1Q2005	3.60%
Source: Lehman Bros.

As I have mentioned previously, Harley's finance subsidiary (HDFS) funded almost half of Harley-Davidson's motorcycle loans. Like subprime mortgage loans, HDFS' hog loans are pooled and securitized to institutional buyers. Unfortunately -- in credit trends and terms -- HDFS is also beginning to look more and more like New Century(NCBC Quote), Fremont(FMT Quote) and Accredited Home Lenders(LEND Quote) did in early 2006.