Warren Buffet's Big Gamble - 8 billion BRK financing Burlington

Feb. 4 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. plans to sell $8 billion of senior unsecured notes to finance part of its purchase of railroad Burlington Northern Santa Fe Corp., the company said in a regulatory filing.

The company also was stripped of its last AAA credit rating by Standard & Poor’s, which cited the acquisition in announcing a downgrade by one level to AA+.

Buffett, 79, is using debt, equity and Berkshire’s cash to finance the biggest purchase of his four-decade career as chief executive officer. Berkshire is tapping the investment-grade bond market as companies rush to secure financing before the Federal Reserve raises interest rates from near-zero, the level for more than a year.

“Berkshire is looking at this as an opportune time to issue both in terms of spreads and absolute rates,” said David James, vice president of fixed income at broker-dealer Wall Street Access in New York. “They think we’re at a fulcrum point on interest rates and they’re trying to lock up short rates before they start rising.”

Berkshire plans to sell $2 billion of one-year floating rate debt that may pay as much as the three-month London interbank offered rate or as little as 3 basis points less than LIBOR, according to the person. It is also marketing $1.1 billion of two-year floating rate debt that pays a yield of 18 basis points above Libor and $1.2 billion of three-year floaters at a spread of about 45 basis points, the person said.

The company also plans to sell $600 million of two-year fixed-rate notes that pay about 65 basis points more than similar-maturity Treasuries, $1.4 billion of three-year debt that may pay a spread of about 85 basis points and $1.7 billion of five-year obligations at a spread of about 95 basis points over the benchmarks, the person said.

The yield on two-year Treasuries may rise to 1.99 percent by the fourth quarter of this year, from 0.81 percent today, according to a Bloomberg survey of 65 economists. The extra yield investors demand to hold investment-grade corporate debt instead of Treasuries has narrowed 8 basis points this year to 182 basis points as of yesterday, according to Bank of America Merrill Lynch data. A basis point is 0.01 percentage point.

In November, Buffett offered $26 billion for the 77.4 percent of Burlington Northern that Berkshire doesn’t already own in what the billionaire investor called an “all-in wager” on the U.S. economy.

S&P’s View

“We believe that the railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity,” S&P said today in a statement downgrading Berkshire. S&P changed its outlook to stable.

Berkshire cut about 3,000 jobs since December after customers scaled back orders for building-related materials, according to today’s filing. The company and its units employ about 222,000 people.

Berkshire hired JPMorgan Chase & Co. and Wells Fargo & Co. to underwrite the offering, it said in the filing. The company tapped JPMorgan and Wells Fargo in November to provide an $8 billion unsecured loan to pay for its takeover of Fort Worth, Texas-based Burlington Northern, it said in a regulatory filing on Nov. 18.

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.

--Editors: Charles W. Stevens, Michael Weiss

To contact the reporters on this story: Tim Catts in New York at +1-212-617-5117 or [email protected]; Andrew Frye in New York at +1-212-617-1869 or [email protected]

To contact the editor responsible for this story: Alan Goldstein at +1-212-617-6186 or [email protected].

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