Berkshire Hathaway Inc said “the credit crisis has abated,” bolstering the firm’s earnings potential after chief executive officer Warren Buffett agreed to pay US$26 billion and take on debt to fund his biggest takeover.
Improvements in the creditworthiness of US companies helped triple third-quarter profit, announced by Berkshire in a filing on Friday, and provide a cushion for Buffett as he buys railroad Burlington Northern Santa Fe Corp. Berkshire made the comment on credit markets in the same filing, saying that “interest rates for investment grade issuers relative to government obligations have declined.”
Refinancing costs for municipalities and the riskiest corporate borrowers plunged, reducing the chance Omaha, Nebraska-based Berkshire would have to pay out on protection it sold against defaults. After a second straight profit increase, Berkshire is risking its AAA credit grade by borrowing about US$8 billion for the purchase of Fort Worth, Texas-based Burlington, a deal Buffett called an “all-in wager” on the US economy.
“He’s clearly talking from the position of a guy that has his finger on the pulse of the world economy,” said Jeff Matthews, the author of Pilgrimage to Warren Buffett’s Omaha and founder of the hedge fund Ram Partners LP. “If he were still worried about credit markets, he wouldn’t be doing this. It does say something for this guy to put that much money on a bet on the US economy.”
The acquisition of Burlington, the biggest US railroad, comes after 12 months in which declining sales at Berkshire’s retailing, manufacturing and jet-leasing units forced the firm to cut jobs and close plants.
The takeover will bring US$10 billion of assumed debt and add about 40,000 employees to a Berkshire workforce that already totals more than 200,000.
“It’s time to take a little more risk,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington.
“He’s now saying ‘OK, if it’s now abating, then it’s time to put money to work rather than keeping it for a rainy day,’” Martin said.
Buffett, the second-richest American, positioned Berkshire to weather the contraction in the US economy by stockpiling US$44 billion in cash. Starting last year, when corporate borrowing costs surged, he drew on that hoard to finance Goldman Sachs Group Inc, General Electric Co, Swiss Reinsurance Co and the Mars Inc takeover of chewing-gum maker Wm Wrigley Jr Co.
Berkshire’s third-quarter profit was fueled by payments from those investments and improved bond prices that allowed the firm to reverse losses on the protection it sold against bad loans through credit-default swap contracts. Net income surged to US$3.24 billion from US$1.06 billion a year earlier as the swaps produced a US$1.44 billion gain.
Berkshire paid US$1.9 billion on soured credit-default swap deals in the first nine months of the year and could be liable for a maximum of about US$25.6 billion if all contracts require full payment, the company’s filing showed.
S&P and Fitch Ratings said last week they may cut Berkshire because of lower liquidity after the Burlington deal. Downgrades, “depending on the degree,” may force Berkshire to post as much as US$1.1 billion of collateral with trading partners, the company said in the filing.
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