Warren Buffett's Berkshire Hathaway will invest $300 million in motorcycle-maker Harley-Davidson, getting a very impressive 15 percent annual interest rate for its money.
In a news release today, Tuesday, Harley-Davidson says Berkshire and Harley's biggest shareholder, Davis Selected Advisers, L.P., have each committed to buying $300 million in senior unsecured notes, due in 2014.
The money will be used to support Harley's finance company and its "ongoing motorcycle lending activities." (If a buyer can't get a loan, it's harder to buy the bike.)
The deal is part of Harley's three-pronged strategy to counter weak economic times: boost consumer demand by investing in the Harley brand, cut costs, and get additional funding for its finance arm.
Harley shares are up sharply today on the news, gaining over 14 percent to $13.56 in early afternoon trading. But the stock, with the very appropriate ticker of HOG, has been a big loser in the economic crisis, falling from a 52-week high of $48.05 on September 19.
Berkshire doesn't get any warrants to buy common stock in this deal, as far as we know. The 15 percent interest rate is well above the 10 percent Buffett got out of Goldman Sachs and General Electric last fall. Those were substantially larger investments, of course, in much bigger companies.
And while Buffett is getting well paid for taking on this risk, it does appear to be a vote of confidence in the ability of Harley, and its well-known brand, to survive the current economic downturn.