WALL STREET JOURNAL: Investors Flock to Berkshire, Kraft Bond Offerings

By ROMY VARGHESE And KELLIE GERESSY-NILSEN

FEBRUARY 5, 2010

Berkshire Hathaway Inc. joined Kraft Foods Inc. in offering a multibillion-dollar bond, and both found plenty of buyers even as disappointing economic news sent investors fleeing from stocks, commodities and other assets.

Berkshire Hathaway will use proceeds of its bond deal to acquire Burlington Northern Santa Fe. Above, a Burlington Northern locomotive sits in a rail yard in of Chicago.

Thursday, Kraft raised $9.5 billion to finance its purchase of British confectioner Cadbury PLC. Berkshire slated the proceeds from its $8 billion deal for its acquisition of Burlington Northern Santa Fe Corp. The two had to offer attractive terms to buyers, however, amid declines in many markets, including a 2.6% drop in the Dow Jones Industrial Average. Kraft bumped up the return on three of the bonds by 0.05 percentage point.

Berkshire also paid a price, in a different way. Standard & Poor’s relieved the company of its coveted triple-A credit rating Thursday because of the railroad deal. Its new three-year fixed-rate note was seen offering 0.25 percentage point more than its existing debt.

Still, the involvement of Warren Buffett in both mergers—as Berkshire chairman he engineered the Burlington takeover, and as a large Kraft shareholder he criticized the Cadbury purchase—was enough to woo some bond buyers.

“For many investors, knowing that Warren Buffett is behind the offering is about all the research he or she may need to do when considering this deal,” said Margie Patel, a senior portfolio manager at Evergreen Investments in Boston.

The size of the corporate-bond deals, both among the top-15 largest on record, illustrates the apparently insatiable demand for debt from companies as highly rated as Berkshire and those such as Kraft that are near the bottom of investment-grade status or are of speculative credit quality.

“It shows how open the credit markets are right now especially for names that are in high recognition and that have shown resiliency in this marketplace,” said Thomas Chow, senior portfolio manager at Delaware Investments in Philadelphia.

High-grade bond funds have seen heavy inflows from investors, while money-market funds have been losing cash for months.

“The demand that we’ve seen for corporate supply has been very strong, despite cross-currents such as sovereign risk in Europe and ongoing regulatory uncertainty,” said Jim Merli, head of fixed-income syndicate for the Americas at Barclays Capital.

Ms. Patel said Berkshire’s move, while not as widely anticipated as Kraft’s, shouldn’t have come as a surprise.

Warren Buffett

“Warren Buffett is taking advantage of an extremely attractive time to finance, with borrowing costs near all-time lows due to narrow Treasury yields and an insatiable appetite evident among investors,” she said.

Still, the corporate-bond markets can be rattled, as was seen briefly in January, said Lon Erickson, portfolio manager at Thornburg Investment Management in Santa Fe, N.M., which declined to buy the Kraft bonds.

“People will still be putting money to work in corporate bonds, and maybe even stretch a little,” Mr. Erickson said. But, he said, “it can turn on a dime.”

Berkshire’s offering, which tied the 11th-largest U.S.-marketed investment-grade deal excluding government-guaranteed debt, since Dealogic records began in 1995, includes six tranches, from one-year floating-rate notes to five-year fixed-rate notes.

Kraft’s offering, which matches the sixth-largest U.S.-marketed investment-grade deal excluding government-guaranteed debt, was widely anticipated in the market. Kraft offered notes maturing in 3.25, six, 10 and 30 years.

Treasurys Surge on Haven Bids

Treasurys rallied as concerns about some European countries’ debt problems and worries about the sustainability of the U.S. economic recovery drove investors toward safer investments.

Riskier assets—including stocks in Europe and the U.S., as well as crude oil and other commodities such as gold—sank, while safer assets like Treasurys, the dollar and Japanese yen, gained.

“There’s a general risk-aversion trade going on,” said Carl Lantz, fixed-income strategist at Credit Suisse. “You throw that in with the disturbing uptrend in jobless claims…people may be wondering if things haven’t improved as much as hoped.”

Late Thursday afternoon in New York, the 10-year note rose 23/32 point, or $7.1875 per $1,000 face value, at 98 2/32, to yield 3.612%, compared with 3.701% late Wednesday, as bond yields move inversely to prices. The 30-year bond climbed 1 12/32, at 97 7/32, to yield 4.546%.

Despite the fall in yields, the 10-year note’s yield has stayed within its recently established trading band of 3.59% to 3.72% ahead of the U.S. nonfarm payrolls report due Friday.

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