Warren Buffett's flagship Berkshire Hathaway (NYSE:BRKa) is taking on debt. A unit of the $115 billion conglomerate, Berkshire Hathaway Finance Corp., is reportedly selling $1.5 billion in unsecured notes, offering five- and ten-year maturities in a sale arranged through Goldman Sachs & Co. (NYSE:GS).
Given that Buffett's conglomerate has $28 billion in cash and astounding free cash flow, investors are questioning why Berkshire would choose to assume any debt at all. And why sell unsecured notes, something the company has rarely done. Berkshire Hathaway will not comment on reports of the sale, leaving investors' questions unanswered.
There may be several good reasons to take on some debt now, however, and with Buffett and Charlie Munger at the helm, it's safe to assume it's "smart" debt. Buffett is best known for his buy-and-hold investment victories with the likes of Coca-Cola (NYSE:KO), but behind the scenes, he's also one of the best hedge artists in the business. Hedging is a large part of successful investing when you're dealing with billions in varied assets.
Interest rates are still hovering near 40-year lows, but the Fed hasn't dropped rates the last several months, perhaps signaling an end to the record-long string of cuts. If you're financially strong and going to take on leverage, then right now -- while rates are at historic lows -- is a good time to do it. Additionally, if you're betting the dollar will continue to slide (or that inflation is coming), it makes sense to borrow now, use the money as you will, and pay the loan back with dollars that are less valuable.
New debt may also be used to finance or pay down higher-interest debt that was assumed with the company's $1.7 billion acquisition of Clayton Homes. [Editor's addition: About an hour after this was published, financing for Clayton Homes was reported to be the reason for the debt.] Remember, although the company has $28 billion in cash, you can't tell from a balance sheet how much of that is otherwise restricted or tied up.
Finally, some are speculating that Buffett & Co. are interested in European acquisitions, so they floated debt to get the ball rolling -- and to bolster relations -- with investment houses. We seriously doubt this. Buffett didn't become the world's best investor by greasing the wheels, and he's Warren Buffett -- if he does want to acquire anything in Europe, investment houses would leap at the chance to help.
The bottom line is that Buffett is a return on invested capital (ROIC) genius (and that's one of the few times the "g" word, which is cheap as nickels these days, will be used appropriately). If Buffett can raise capital cheaply and earn a greater return on it elsewhere, then he's going to do precisely that.
We'd like to draw conclusions from the debt and say Buffett must believe interest rates have bottomed, for instance, but the only sure takeaway is he's raising cheap capital and looks to employ it elsewhere for greater gain. That or he wanted the 1.5 billion airline miles.
Jeff Fischer has a stake in Coca-Cola. It's a wholly inconsequential stake, but a stake nonetheless. (A little more "less" than "none.")
