Berkshire Finance to Issue Notes - Analyst Blog

Yesterday, Berkshire Hathaway Finance Corporation, a subsidiary of Berkshire Hathaway Inc. (BRK.A, BRK.B) announced the issue of $1.0 billion notes, out of which $750 million will be senior notes due 2040 and $250 million will be floating rate senior notes due 2012.

The $750 million senior notes will carry an interest rate of 5.75%, which will be paid semi-annually, with the first payment due on July 16, 2010. Interest on the $250 million of floating rate senior notes is set at 115 basis points above the 3 months LIBOR, will be paid semi-annually, with the first interest payment due on July 13, 2010.

The proceeds of the notes offering will be used to satisfy and retire the company’s existing 4.125% senior notes due 2010.

The notes will be senior unsecured indebtedness of Berkshire Hathaway Finance Corporation and will rank equally with all its other existing and future senior unsecured indebtedness. The guarantee will be a senior unsecured obligation of Berkshire Hathaway Inc. and will rank at par with all of its other existing and future senior unsecured obligations.

JPMorgan Securities, a division of JPMorgan Chase & Co. (JPM) will be the sole book running manager and Wells Fargo Securities, a division of Wells Fargo & Company (WFC) will act as the joint lead manager to the issue. Moody’s Investors Service (MCO), Fitch and Standard & Poor’s (MHP) have assigned a rating of “Aa2,” “AA+” and “AAA”, respectively, to the to the notes. All the ratings denote a high quality.

In November of last year, Berkshire Hathaway secured a loan of $8 billion arranged by JPMorgan Chase and Wells Fargo to help fund the acquisition of Burlington Northern Santa Fe Corporation (BNI). Berkshire entered into a merger agreement with Burlington Northern, pursuant to which Berkshire has proposed to acquire, for cash and stock, the remaining 77.4% of the outstanding shares of Burlington Northern common stock that Berkshire does not already own.

For the nine months ended September 2009, the earnings to fixed charge ratio were 5.14X, down from 4.33X in 2008. We expect a further drag on the ratio and the company’s financial flexibility in the near term as a result of the $26.3 billion rail acquisition, which is expected to close in the first quarter of this year, will mostly be paid in cash. In the long term, however, the acquisition is expected to enhance earnings and cash flow, and further diversify the company’s portfolio of owned businesses.