Harley Davidson 2013 Annual Report Download - page 75

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rate at December 31, 2013 or 2012 as HDFS had no outstanding borrowings under the U.S. Conduit during 2013 or
2012.
Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2013, HDFS amended its agreement with a Canadian bank-sponsored asset-backed commercial paper
conduit facility (Canadian Conduit). The amended agreement has terms that are similar to those of the original
agreement, entered into in August 2012, and is for the same amount. Under the agreement, the Canadian Conduit is
contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance
receivables for proceeds up to C$200 million. 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$200 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. Unless earlier terminated or extended by mutual
agreement of HDFS and the lenders, the Canadian Conduit expires on June 30, 2014. The contractual maturity of the
debt is approximately 5 years.
During 2013 and 2012, HDFS transferred $101.1 million and $230.0 million, respectively, of Canadian retail
motorcycle finance receivables for proceeds of $88.6 million and $201.3 million, respectively. This transaction is
treated as a secured borrowing, and the transferred assets are restricted as collateral for payment of the debt.
For the years ended December 31, 2013 and 2012, HDFS recorded interest expense of $3.4 million and $1.1
million, respectively, on the secured notes. Interest expense on the Canadian Conduit is included in financial services
interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 2.03% and 1.95% at
December 31, 2013 and 2012, respectively.
As HDFS 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 $38.8 million at December 31, 2013. The
maximum exposure is not an indication of the Company's expected loss exposure.
8. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a
recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are
those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-
recurring basis are those that are adjusted to fair value when a significant event occurs. In determining fair value of assets and
liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from
instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is
actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not
require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and
may require management judgment.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the
extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for
identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency
exchange rates, commodity rates and yield curves. The Company uses the market approach to derive the fair value for its level
2 fair value measurements. Foreign currency exchange contracts are valued using publicly quoted spot and forward prices;
commodity contracts are valued using publicly quoted prices, where available, or dealer quotes; interest rate swaps are valued
using publicized swap curves; and investments in marketable debt and equity securities are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management's judgments about the assumptions market
participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the
hierarchy assessment disclosed in the following tables.