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Asset-Backed Financing | 12 Months Ended
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Dec. 31, 2019
Transfers and Servicing [Abstract] |
Asset-Backed Financing | Asset-Backed Financing The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing. In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing (ASC Topic 860). To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing. If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s Consolidated balance sheets and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the Consolidated statements of income. The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs. The assets and liabilities related to the on-balance sheet asset-backed financings included in the Consolidated balance sheets at December 31, were as follows (in thousands):
| 2019
| Finance receivables |  | Allowance for credit losses |  | Restricted cash |  | Other assets |  | Total assets |  | Asset-backed debt
On-balance sheet assets and liabilities: |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Asset-backed securitizations | $ | 826,047 |  |  | $ | (24,935 | ) |  | $ | 36,037 |  |  | $ | 778 |  |  | $ | 837,927 |  |  | $ | 764,392 |
Asset-backed U.S. commercial paper conduit facilities | 533,587 |  |  | (16,076 | ) |  | 27,775 |  |  | 1,642 |  |  | 546,928 |  |  | 490,427 |
Unconsolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Asset-backed Canadian commercial paper conduit facility | 232,699 |  |  | (2,786 | ) |  | 7,686 |  |  | 296 |  |  | 237,895 |  |  | 114,693 |
| $ | 1,592,333 |  |  | $ | (43,797 | ) |  | $ | 71,498 |  |  | $ | 2,716 |  |  | $ | 1,622,750 |  |  | $ | 1,369,512 |
| 2018
| Finance receivables |  | Allowance for credit losses |  | Restricted cash |  | Other assets |  | Total assets |  | Asset-backed debt
On-balance sheet assets and liabilities: |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Asset-backed securitizations | $ | 158,718 |  |  | $ | (4,691 | ) |  | $ | 17,191 |  |  | $ | 329 |  |  | $ | 171,547 |  |  | $ | 95,167 |
Asset-backed U.S. commercial paper conduit facilities | 631,588 |  |  | (18,733 | ) |  | 30,012 |  |  | 1,234 |  |  | 644,101 |  |  | 582,717 |
Unconsolidated VIEs: |  |  |  |  |  |  |  |  |  |  |
Asset-backed Canadian commercial paper conduit facility | 181,774 |  |  | (3,130 | ) |  | 8,779 |  |  | 343 |  |  | 187,766 |  |  | 155,951 |
| $ | 972,080 |  |  | $ | (26,554 | ) |  | $ | 55,982 |  |  | $ | 1,906 |  |  | $ | 1,003,414 |  |  | $ | 833,835 |
On-Balance Sheet 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 on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the 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. Restricted cash balances held by the SPEs are used only to support the securitizations. 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. The secured notes have various contractual maturities ranging from 2020 to 2026. The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE. During 2019, the Company transferred $539.1 million and $580.2 million, respectively, of U.S. retail motorcycle finance receivables to SPEs. The SPEs in turn issued $500.0 million and $525.0 million, or $498.7 million and $522.6 million net of discounts and issuance costs, respectively, of secured notes through on-balance sheet asset-backed securitization transactions. There were no on-balance sheet asset-backed securitization transactions during 2018. At December 31, 2019, the Consolidated balance sheets 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
June 2019 |  | $525,000 |  | 2.37% |  | July 2020 - November 2026
May 2019 |  | $500,000 |  | 3.05% |  | July 2026
In addition, outstanding balances related to the following secured notes included in the Consolidated balance sheets at December 31, 2018 were repaid during 2019 (in thousands):
Issue Date |  | Principal Amount at Date of Issuance |  | Weighted-Average Rate at Date of Issuance |  | Contractual Maturity Date
May 2015 |  | $500,000 |  | 0.88% |  | May 2016 - December 2022
January 2015 |  | $700,000 |  | 0.89% |  | February 2016 - August 2022
For the years ended December 31, 2019 and 2018, interest expense on the secured notes was $13.3 million and $3.2 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding on-balance sheet asset-backed securitization transactions was 2.36% and 1.67% at December 31, 2019 and 2018, respectively. On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – The Company has two separate agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In May 2019, the Company amended its $300.0 million revolving facility agreement to allow for incremental borrowings, at the lender's discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. On November 27, 2019, the Company renewed its existing $600.0 million and amended $300.0 million revolving facility agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral. Under the U.S. Conduit Facilities, 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 or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the U.S. Conduit Facilities have an expiration date of November 25, 2020. The Company is the primary beneficiary of its U.S. Conduit Facilities VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE. The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to the U.S. Conduit Facilities and the respective proceeds (in thousands):
| 2019 |  | 2018
| Transfers |  | Proceeds |  | Transfers |  | Proceeds
First quarter | $ | — |  |  | $ | — |  |  | $ | 32,900 |  |  | $ | 29,300 |
Second quarter | — |  |  | — |  |  | 59,100 |  |  | 53,300 |
Third quarter | 174,400 |  |  | 154,600 |  |  | — |  |  | — |
Fourth quarter | — |  |  | — |  |  | 400,200 |  |  | 356,800 |
| $ | 174,400 |  |  | $ | 154,600 |  |  | $ | 492,200 |  |  | $ | 439,400 |
For the years ended December 31, 2019 and 2018, interest expense under the U.S. Conduit Facilities was $18.5 million and $10.9 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding U.S. Conduit Facilities was 2.63% and 3.26% at December 31, 2019 and 2018, respectively. On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – In June 2019, the Company renewed its 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 for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of debt. 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$220.0 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 Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the Canadian Conduit expires on June 26, 2020. The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting. 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 $123.2 million at December 31, 2019. The maximum exposure is not an indication of the Company's expected loss exposure. The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
| 2019 |  | 2018
| Transfers |  | Proceeds |  | Transfers |  | Proceeds
First quarter | $ | — |  |  | $ | — |  |  | $ | 7,600 |  |  | $ | 6,200 |
Second quarter | 28,200 |  |  | 23,400 |  |  | 38,900 |  |  | 32,200 |
Third quarter | — |  |  | — |  |  | — |  |  | — |
Fourth quarter | — |  |  | — |  |  | 39,000 |  |  | 32,200 |
| $ | 28,200 |  |  | $ | 23,400 |  |  | $ | 85,500 |  |  | $ | 70,600 |
For the years ended December 31, 2019 and 2018, interest expense on the Canadian Conduit was $3.6 million and $3.8 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 2.68% at December 31, 2019 and 2018. Off-Balance Sheet Asset-Backed Securitization VIE – There were no off-balance sheet asset-backed securitization transactions during the years ended December 31, 2019, 2018 and 2017. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to a SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Consolidated balance sheets and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in Financial Services revenue in the Consolidated statements of income. At December 31, 2019, the assets of this off-balance sheet asset-backed securitization VIE were $35.2 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at December 31, 2019. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses. Servicing Activities – The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the Consolidated statements of income. The fees the Company is paid for servicing represent adequate compensation and, consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $0.6 million and $1.1 million for the years ended December 31, 2019 and December 31, 2018, respectively. The unpaid principal balance of retail motorcycle finance receivables serviced by the Company at December 31, was as follows (in thousands):
| 2019 |  | 2018
On-balance sheet retail motorcycle finance receivables | $ | 6,274,551 |  |  | $ | 6,185,350 |
Off-balance sheet retail motorcycle finance receivables | 35,197 |  |  | 79,613 |
| $ | 6,309,748 |  |  | $ | 6,264,963 |
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent at December 31, was as follows (in thousands):
| Amount 30 days or more past due
| 2019 |  | 2018
On-balance sheet retail motorcycle finance receivables | $ | 244,498 |  |  | $ | 228,015 |
Off-balance sheet retail motorcycle finance receivables | 885 |  |  | 1,658 |
| $ | 245,383 |  |  | $ | 229,673 |
Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company, for the years ended December 31, were as follows (in thousands):
| 2019 |  | 2018
On-balance sheet retail motorcycle finance receivables | $ | 125,840 |  |  | $ | 109,448 |
Off-balance sheet retail motorcycle finance receivables | 458 |  |  | 907 |
| $ | 126,298 |  |  | $ | 110,355 |

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -URI http://asc.fasb.org/topic&trid=2197590 + Details
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