Buffett on Corporate Debt

In a rare move, on February 4, Berkshire Hathaway issued $8 billion of new debt (5.75% notes due January 15, 1940) in connection with its acquisition of Burlington Northern Santa Fe Corp.

In her comments on the issuance, Margie Patel, a senior portfolio manager at Evergreen Investment in Boston, said: "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."
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Romy Varghese and Kellie Geressy-Nelson, Wall Street Journal, February 5, 2010

Over the past 30 years, in his shareholder letters, Buffett has written about the appropriate type and the timing of the issuance of corporate debt.

"Except for token amounts....We are not interested in incurring any significant debt at Berkshire for acquisition or operating purposes. Conventional business wisdom, of course, would argue that we are being too conservative and that there are added profits that could be safely earned if we injected moderate leverage into our balance sheet."
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2005 Letter to Berkshire Hathaway Shareholders

"We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. We will reject interesting opportunities rather than over-leaverage our balance sheet. This conservatism has penalized our results but it the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, lenders and the many equity holders who have committed unusually large portions of their net worth to our care. As one of the Indianapolis "500" winners said: "To finish first, you must first finish."
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1996 Letter to Berkshire Hathaway Shareholders

"In general, we continue to have an adversion to debt, particularly the short-term kind. But we are willing to incur modest amounts of debt when it is porperly structured and of significant benefit to shareholders."
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1992 Letter to Berkshire Hathaway Shareholders

"Unlike many in the business world, we prefer to finance in anticipation of need rather than in reaction to it. A business obtains the best financial results possible by managing both sides of its balance sheet well. This means obtaining the highest-possible rturn on assets and the lowest-possible cost on liabilities. It would be convenient if opportunities for intelligent action on both fronts coincided. However, reason tells us that just the opposite is likely to be the case. Tight money conditions which translate into high costs for liabilities, will create the best opportunities for acquisitions, and cheap money will cause assets to be bid to the sky. Our conclusion: Action on the liability side should sometimes be taken independent of any action on the asset side."
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1987 Letter to Berkshire Hathaway Shareholders

"Unlike most businessses, Berkshire did not finance because of any specific immediate needs. Rather, we borrowed because we think that, over a period far shorter than the life of the loan, we will have many opportunities may present themseves at a time when credit is extremely expensive-or even unavailable. At such a time we want to have plenty of financial firepower."
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1980 Letter to Berkshire Hathaway Shareholders