Buffett Issue to Carry Negative Interest

From Reuters

Warren Buffett’s Berkshire Hathaway Inc. said Tuesday that it planned to sell the first-ever securities with a negative interest rate.

The $250-million offering would make investors pay the billionaire for the ability to buy his company’s stock in the future.

The Omaha-based holding company, whose insurance businesses provide money for Buffett to invest, said it plans to privately offer a security called a “Squarz,” which consists of a senior note and a warrant to buy Berkshire Class A or Class B shares.

The sale is expected by early today, people familiar with the matter said.


“It’s a very interesting piece of paper,” said Tom Dinsmore, chairman of Davis-Dinsmore Management Co. in Morristown, N.J., which runs $200 million of convertible bond funds. “Anyone interested in Berkshire Hathaway equity would be interested.”

“In a post-Enron environment, investors are looking for high-quality paper,” said Jeff Seidel, global head of convertible research at Credit Suisse First Boston, referring to the energy trader now in Chapter 11 proceedings. “This is an aggressive structure. But there is a lot to be said for high-quality issuance in this market, and Warren Buffett might be the kind of person who can get something like this done.”

The securities would allow purchasers who are confident that Berkshire shares will rise to buy those shares at some future date at a set price.

Berkshire shares have risen 4,000-fold from May 1965, when Buffett took over an old textile firm making jacket linings. If you bought $250 of the shares at that time, at the closing price of $18, they would be worth more than $1million today.

Forbes magazine last year put Buffett’s net worth at $33.2 billion, making him the second-richest American after Microsoft Corp. Chairman Bill Gates.

Berkshire’s Class A shares closed Tuesday on the New York Stock Exchange at $77,900, up $300. Its Class B shares closed on the Big Board at $2,580, up $3.

The five-year convertible securities are expected to carry a coupon of negative 0.5% to negative 1% and be convertible into Berkshire shares at a 12% to 15% premium over the shares’ Tuesday closing price, people familiar with the sale said. Conversion is at the investors’ discretion.

“This is classic Buffett,” Seidel said. “Warren Buffett has written that zero-coupon bonds have tremendous tax advantages for Berkshire Hathaway. This seems to be the logical next step.”


Berkshire cannot buy back the securities from investors, but investors may sell them back to Berkshire after one, two, three and four years, people familiar with the deal said.

“In essence you’re paying [about] negative three-quarters of a point for the option to buy the stock,” said Adrian Miller, director of convertible research at Salomon Smith Barney. The bet would pay off if the stock in the next few years were to rise above the securities’ conversion value.

Berkshire said it will use net proceeds from the sale for general corporate purposes, including possible acquisitions.

The company is one of only eight to hold “triple-A” credit ratings from Moody’s Investors Service and Standard & Poor’s.


Goldman Sachs & Co. is arranging the sale, people familiar with the matter said.

NYSE Reports 2%

Drop in Short Interest

Some stock market bears may have turned nervous in recent weeks about the potential for a sustained rally in stocks.


The New York Stock Exchange said Tuesday that “short interest"--the number of NYSE-listed shares borrowed and sold, usually in a bet on lower prices--declined as of mid-May from the record set in mid-April.

The NYSE said total short interest fell nearly 2% to 6.703 billion shares as of May 15, down from the all-time high 6.835 billion April 15.

It was the first monthly decrease in shorted shares since January.

The number of NYSE shorted shares has rocketed since the bear market began in spring 2000. NYSE short interest in March 2000 was 4.1 billion shares. The total rose to 5.6 billion by mid-2001.


Short sellers profit if the market price of the shares they have shorted falls. They then can buy the shares in the market to close out their loan and pocket the difference between their sale price and the repurchase price.

But if a shorted stock’s market price rises, a short seller faces potentially unlimited losses. So short sellers often opt to pare their bearish bets when stocks rally, rather than risk mounting losses.

The blue-chip Standard & Poor’s 500 index tumbled 5.5% between mid-March and mid-April and continued to slide into early May, bottoming May 7. Stocks resurged last week, with the S&P; rising 4.9%.

NYSE short interest as of May 15 accounted for 1.9% of the total number of shares outstanding.


The American Stock Exchange said short interest in its market rose to 484 million shares as of May 15 from 471 million as of mid-April.

A Times Staff Writer