JPMorgan Chase & Co. and Wells Fargo & Co. are arranging an $8 billion loan for Warren Buffett’s Berkshire Hathaway Inc. to help finance the takeover of railroad Burlington Northern Santa Fe Corp.The full acquisition price is $26 billion, so he is going to be drawing down a huge chunk of cash reserves, also.
The banks are providing a one-year loan with an interest rate 1 percentage point to 2 percentage points more than the London interbank offered rate, Fort Worth, Texas-based Burlington said yesterday in a regulatory filing. Three-month Libor, a borrowing benchmark, was set at 0.27 percent yesterday.
But the short term borrowing has me puzzled. Isn't borrowing short-term at a low interest rate to buy a long-term asset what caused a lot of problems for housing buyers? I certainly hope Buffett isn't expecting interest rates to be lower one year out. The best I can figure is that Buffett is expecting to cash out of other positions to pay down the debt and that he is using the short-term loan as a bridge while he liquidates his other positions.
Wenzel,
ReplyDeleteI was puzzling over the debt aspect of the buyout as well but I like your theory about using it as a bridge while he liquidates assets.
That's a lot of assets to liquidate though... he better do it quick while the market is peaking. And then where will he park that cash in the meantime?