Monday, November 23, 2009

What's Up with Buffett's Financing Move?

Bloomberg is reporting that Warren Buffett's Berkshire Hathaway is in part financing its acquisition of Burlington Northern Santa Fe Corp. by borrowing $8 billion for just one year:

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 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.
The full acquisition price is $26 billion, so he is going to be drawing down a huge chunk of cash reserves, also.

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.

1 comment:

  1. Wenzel,

    I 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?