Dollar investment grade (financial) deal of the year – Berkshire Hathaway

Dollar investment grade (financial) deal of the year – Berkshire Hathaway

Issuer: Berkshire Hathaway
Issue date: February 4, 2010
Size: $8 billion
Ratings: Aa2/AA+ (Moody’s/S&P)

Floating rate tranches
Tranche size: $2 billion (2011); $1.1 billion (2012); $1.2 billion (2013)
Coupons: 3m Libor – 2bp;
3m Libor + 18bp; 3m Libor + 43bp

Fixed rate tranches
Tranche size: $600 million (2012); $1.4 billion (2013); $1.7 billion (2015)
Coupons: 1.4% (US Treasuries + 63bp); 2.125% (US Treasuries + 83bp); 3.2% (US Treasuries + 93bp)

When seeing the name Berkshire Hathaway, one immediately thinks of its main shareholder, chairman and chief executive, Warren Buffet. Perhaps the world’s most famous investor, the “Sage of Omaha” is noted for his thriftiness – paying himself a nominal annual salary of $100,000 for the best part of 30 years.

That is the kind of attribute bond investors drool over, so it stands to reason that when Berkshire Hathaway came to market with an $8 billion offering in February, it would be a runaway success. The reality was not so straightforward, however. Buffet may be frugal, but Berkshire Hathaway and the companies under it have an enormous amount of debt outstanding. Fixed income investors consolidate up and would have looked at the aggregate credit exposure; it is not as if there is particular scarcity value.

The deal provided part of the financing for Berkshire to buy the remaining $26 billion of shares it did not own in railway operator Burlington Northern Santa Fe. That acquisition prompted S&P to downgrade it from AAA to AA+ on February 8, the day of the company’s new bond issue.

Add to the mix persistent sovereign volatility present at the time, and the fact Kraft was in the market on the same day with a $9.5 billion bond issue to fund its hostile takeover of UK chocolate maker Cadbury, and the backdrop was more challenging than it might have appeared.

“Conditions were still volatile enough that we watched the market day by day for the appropriate entry. It was a lot of money to raise, and since the crisis no one is cavalier about issuing multi-billion dollar deals,” says Therese Esperdy, head of global debt capital markets at JP Morgan, sole bookrunner on the Berkshire Hathaway transaction.

“Berkshire had a very specific agenda in terms of how it wanted to spread the maturity schedule. Again, that was quite unusual; you don’t often have a client come to you saying ‘I want to do X amount in one-year notes’ etc. You could almost say it was a scripted execution in terms of what the client wanted, and I think we hit on every single one of the objectives,” adds Esperdy.

With interest rates at historical lows, most issuers have focused their efforts of late on fixed rate tranches. Berkshire Hathaway decided to included three floating rate tranches, after discussions with JP Morgan determined this would be positive from a cost perspective. 

“There has virtually been no re-emergence in size of the front end of the term market. The investor base for large short-dated issuance has virtually disappeared. Pre-crisis, any double-A rated financial institution would come in and be able to sell $1.5 billion or $2 billion of a two-year floater on the wire without even thinking about it. The investor base, however, has completely changed, and this was the first time we saw a large execution in the front end of the market,” says Esperdy.

The strategy paid dividends, with the borrower able to price two basis points inside Libor on the one-year floaters; and 18bp and 43bp over Libor on the two- and three-year FRNs. The fixed rate tranches also priced competitively, with coupons ranging from 1.433% on the two-year notes to 3.218% on the five-year bonds.

One of the other interesting features of the deal was that, excluding self-funding, it was the largest sole-led offering ever in the investment grade market.

“This was also a sole books deal, unlike the vast majority of transactions in the bond market,” says Esperdy.