Berkshire Hathaway Inc.’s $1 billion note sale shows that while Chief Executive Officer Warren Buffett may pity investors who’ve stuck with bonds as yields fall to record lows, he’ll sell them as much debt as they want.
The company’s Berkshire Hathaway Finance Corp. sold five-and 30-year securities offering the company’s lowest coupons for those maturities ever. Berkshire, whose holdings span insurance, railroads, newspapers and manufacturing, has reduced its bond investments to $28.6 billion from $34.1 billion in the last three years, regulatory filings show.
Berkshire isn’t buying corporate bonds, Buffett, 82, said during a May 4 interview with Bloomberg Television’s Betty Liu after the company’s annual meeting in Omaha, Nebraska. With the average yield on U.S. corporate debt having fallen to a record low 3.35 percent this month from more than 11 percent in 2008, the second-richest American said at the meeting he has empathy for savers who depend on bond interest.
“Buffett’s views on current interest rates are pretty clear,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which oversees about $270 million including Berkshire shares. “Berkshire issuing debt is effectively an efficient way to short the bond market.”
Berkshire Hathaway Finance’s offering yesterday consisted of $500 million each of five-year, 1.3 percent notes with a yield that’s 57 basis points more than similar-maturity Treasuries, and 4.3 percent, 30-year bonds at a 135 basis-point spread. Berkshire Hathaway Finance holds loans to Clayton Homes Inc., a Berkshire unit that manufactures housing.
The 2043 debt, issued at 99.18 cents on the dollar, traded at 99.9 cents to yield 4.31 percent at 12:01 p.m., according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Proceeds will be used to redeem $1 billion of 4.6 percent notes maturing on May 15, according to a regulatory filing. The company last offered debt in January, in a four-part deal that included $1 billion of 30-year notes, also to finance maturing securities.
“I feel sorry for people that have clung to fixed-dollar investments” Buffett said at the annual meeting. “The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal.”
Buffett didn’t respond to a request for comment on the bond sale sent to Carrie Sova, an assistant.
“When we borrow money, we’re thinking in terms of long maturities,” Buffett said in a Fox Business Network television interview on May 6. “Anybody who’s borrowing money now should borrow out for a long period of time.”
In its three debt offerings since May 2012, Berkshire sold a combined $3.5 billion of debt due in 10 years or later, about 54 percent of the total, Bloomberg data show. In the three offerings prior to that, maturities of 10 years accounted for 36 percent.
Berkshire has been shrinking the size and duration of its own fixed-income portfolio, regulatory filings show. The company held $10.1 billion of corporate debt on March 31, down 24 percent from the first quarter of 2010.
The amount of fixed-income investments excluding mortgage-backed debt due in one year or less has grown to 25 percent of the portfolio, up from 18 percent in March 2010, filings show. Securities due in five through 10 years declined six percentage points to 17 percent.
Buffett has shown a preference for obtaining yield by providing financing to other companies with preferred stock at higher interest rates than available in the corporate bond market. During the financial crisis in 2008, he bought $5 billion of preferreds from Goldman Sachs Group Inc. and $3 billion from General Electric Co. with 10 percent yields. The companies have since redeemed those securities.
The following year, Berkshire purchased $3 billion of 8.5 percent convertible preferred stock from Dow Chemical Co. to help it pay for its acquisition of Rohm & Haas Co., and in 2011 it bought $5 billion of 6 percent securities from Bank of America Corp. This year, Berkshire was part of a group that struck a deal to acquire HJ Heinz Co. in a transaction that includes an $8 billion preferred stake for Buffett with a 9 percent yield, and last month he agreed to refinance $94 million of debt at newspaper publisher Lee Enterprises for 9 percent.
The Federal Reserve has kept interest rates near zero since December 2008 to bolster the economy, pushing spreads on U.S. corporate debt to record lows. The extra yield investors demand to hold investment-grade bonds instead of Treasuries has tightened to a five-year low of 143 basis points this month from as high as 656 basis points in December 2008, Bank of America Merrill Lynch data show. Over that period, investment-grade yields have fallen to a record low 2.65 percent from 8.59 percent, the data show.
A basis point is 0.01 percentage point.
“It continues to be a good time to issue debt, whether you’re talking about absolute yield or relative spread levels,” Thomas Chow, a Philadelphia-based money manager at Delaware Investments who helps oversee about $135 billion, said in a telephone interview. Berkshire is “a high-cachet name,” creating demand for its securities, he said.
Bonds from Berkshire are the worst performers in the Bank of America Merrill Lynch U.S. Property & Casualty Insurance index this year through yesterday, rising an average 0.9 percent, compared to the 3.4 percent index gain.
“They tend to trade a little bit cheaper because of the company makeup, but I don’t think it’s anything specific to Berkshire as a business,” Matthew Duch, a fund manager at Calvert Investments Inc. in Bethesda, Maryland, which oversees more than $12 billion in assets including Berkshire debt, said in a telephone interview. “Berkshire tends to be a name that people are either in need of have too much of.”
In line with Buffett’s advice to stick with equities, Berkshire’s Class A shares have returned 24 percent this year. The shares, unsplit since Buffett bought the company in 1965, slipped 0.2 percent to $166,000 today.
Buffett began buying shares in Berkshire Hathaway, then a textiles business, in 1962 after studying under Benjamin Graham, a Columbia University professor who co-authored the value-investing guide “The Intelligent Investor.”
Berkshire owns a stable of insurance companies including Geico and General Re, and companies ranging from MidAmerican Energy to chemicals maker Lubrizol to the Burlington Northern Santa Fe railroad. It also has minority stakes in companies that include International Business Machines Corp. and Coca-Cola Co.
The parent company and its finance arm are rated Aa2 by Moody’s Investors Service, the third-highest grade.
“The argument is that with yields on high-quality debt as low as they are, the compensation you’re receiving for taking risk has declined,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “Still, there are natural buyers of long-term debt who aren’t swayed by the relative value between credit and equity. And because there’s little long-term debt sold, what is issued is gobbled up quickly.”