Wednesday May 22, 11:29 am Eastern Time Reuters Business Report Berkshire Sells 1st Negative Coupon Paper
By Jonathan Stempel
NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc. said on Wednesday it sold $400 million of what it called the first securities with a negative interest rate, as investors demonstrated willingness to take a loss now in the hope of buying Berkshire shares at a good price within five years.
"Despite the lack of precedent, a negative coupon security seemed possible in the present interest rate environment," said Buffett, Berkshire's chairman, in a statement.
The sale leaves investors in the curious position of paying interest to a man recently worth $33 billion.
"I don't think he needs the money," said Ted Southworth, who runs the $190 million Northern Income Equity Fund in Chicago. Southworth did not buy the convertible securities, which are stock-bond hybrids, despite, or perhaps because of, Buffett's legendary reputation as an investor.
"Given that Warren Buffett is selling something, should I really be buying?" Southworth asked.
Berkshire, the Omaha, Nebraska-based holding company, whose insurance and reinsurance businesses provide Buffett money to invest, boosted its sale 60 percent from $250 million.
It offered a security called a "SQUARZ," pronounced "squares," which consisted of a senior note and a warrant to buy Berkshire (NYSE:BRKa - News; NYSE:BRKb - News) Class "A" or "B" shares.
The five-year securities carried an effective coupon of negative 0.75 percent and are convertible into Berkshire shares at a 15 percent premium over the "A" shares' closing price on Tuesday on the New York Stock Exchange of $77,900. Berkshire said it may sell another $100 million of SQUARZs to meet demand.
Berkshire pays investors 3 percent on the note, while investors pay Berkshire 3.75 percent on the warrant.
"We're yield buyers, and this is the antithesis of that," said Marty Hollenbeck, who invests $400 million in convertibles for Cincinnati Financial Corp., and did not buy the SQUARZs.
Forbes magazine last year put Buffett's net worth at $33.2 billion, making him the second-richest American after Microsoft Corp.(NasdaqNM:MSFT - News) Chairman Bill Gates.
Berkshire's Class "A" shares, which have never been split, traded Wednesday morning on the New York Stock Exchange at $76,900, down $1,000. Its "B" shares traded on the Big Board at $2,545, down $35.
ACQUISITIONS
Berkshire said it will use net proceeds from the sale for general corporate purposes, including possible acquisitions, none of which have been announced.
Buffett has built Berkshire through acquisitions since May 1965, when he took over what had been a sleepy textile firm that made jacket linings.
Berkshire now includes such companies as reinsurer General Re Corp., car insurer Geico Corp., ice cream purveyor International Dairy Queen Inc. and underwear maker Fruit of the Loom Ltd. Its shares have risen more than 4,000-fold in the last 37 years.
Southworth said he listened to Buffett on a conference call on Tuesday and suggested the billionaire may have conducted the sale to enhance Berkshire's position as an acquirer of companies.
"He may be advertising, here and overseas, for companies that might be for sale, and that he wants to position himself at the top of anyone's list," said Southworth. "His attitude is that if he misses one buying opportunity, it's one too many."
Analysts say Buffett also may have conducted the sale because selling negative-coupon convertibles, like selling the more common zero-coupon convertibles, can be tax efficient.
Berkshire cannot buy the SQUARZs back, although investors may sell them back to the company after one, two, three and four years.
Berkshire Hathaway is one of only eight companies to hold "triple-A" credit ratings from Moody's Investors Service and Standard & Poor's.
Goldman Sachs & Co. arranged the sale.