Preferred and Debt Investments

[zarley]

I noticed that Goldman Sachs is trading around $140 these days, which is a good thing for BRK due to the warrants that were attached to the preferred purchase late last year.  That got me to thinking about all of the various debt and preferred deals Buffett has done in the last 6-9 months.  I've tried to put together a summary of the investments, their interest rates, and the overall income they'll be generating.  Here's what I came up with:

 

Preferreds ($ in millions)

GS* -- $5,000 at 10% = $500

GE* -- $3,000 at 10% = $300

Wrigley -- $2,100 at 5% = $105 (convertable to Wrigley common at undisclosed terms)

Swiss Re -- $2,700 at 12% = $327 (convertable to Swiss Re common at $22.72, current price ~$32)

Dow -- $3,000 at 8.5% = $255 (convertable to Dow common at $41.30, current price ~$17)

 

Total Preferreds = $15,800 invested with annual dividends of ~$1,500

 

Debt ($ in millions)

Wrigley -- $4,400 at 11.5% = $504

Harley -- $300 at 15% = $45

USG -- $300 at 10% = $30 (convertable to USG common at $11.44, current price ~$12.23)

Tiffany -- $250 at 10% = $25

Sealed Air -- $150 at 12% = $18

Vulcan -- $400 at ~10.3% = $38.1   (approximate avg. of two notes with different interest and duration)

 

Total Debt = $5,800 invested with annual interest of ~$663

 

* GS and GE warrants

GS -- $5,000 of warrants with strike at $115 -- current gain ~$1,300

GE -- $3,000 of warrants with strike at $22.25 -- current gain = 0

 

So, BRK put a little over $21,500 million to work which will generate $2,150 million in interest and dividends per year for at least the foreseeable future.  The GE warrants may turn out worthless, but the GS warrants look like they may add a billion or two in realized profits at some point down the road.

 

Additions and corrections welcomed.

 

zarley

 

Edit 1:  added $400 vulcan debt

Edit 2:  added clarification regarding convertable nature of some issues

[JAllen]

Berkshire lent Vulcan material money also.  I forget the details though.

 

 

[zarley]

Thanks Pof, I'll add that information.

[treasurehunt]

I think you missed some warrants:

 

DOW: $3,000 of warrants at a strike price of $41.32

Swiss Re: roughly $2,700 of warrants at a strike price of about $23

USG: $300 of warrants at a strike price of $11.40

Wrigley: unknown number of warrants at unknown terms

 

By my calculations, Berkshire's warrants are in the money by about $2,300 right now ($1,100 for GS and $1,200 for Swiss Re).

[zarley]

I think you missed some warrants:

 

DOW: $3,000 of warrants at a strike price of $41.32

Swiss Re: roughly $2,700 of warrants at a strike price of about $23

USG: $300 of warrants at a strike price of $11.40

Wrigley: unknown number of warrants at unknown terms

 

By my calculations, Berkshire's warrants are in the money by about $2,300 right now ($1,100 for GS and $1,200 for Swiss Re).

 

Hmmmm . . . I'll take a closer look at that.  What I read about those issues described the preferreds as convertable, not having extra warrants included.  My review wasn't very thorough, so I may have misread, or caught some bad reporting.  If all of those preferred purchases included the warrant kickers, a la GS and GE, then  . . .  damn that's great.  

 

Edit -- After a little looking, you seem to be treating the convertable preferreds the same as the GS and GE preferreds with the bonus warrants.  While I think your estimate of the Swiss Re gains are right, there is a difference between the warrants and simply a convertable preferred.  With the warrants, Berkshire gets the upside potential of the common appreciation without having to trade in the preferred shares.  So, they get their 10% dividend on top of the other equity gains.  With the convertables, it's more of an either/or proposition.  For that reason, the GE and GS investments look to have better terms for BRK than the others.

 

With that said, I should add a note to the original post indicating that most of those positions are convertable in one way or another.  For simplicity's sake, I don't think I want to add the details.

 

[Mandeep]

Meaning....

 

GE and DOW will follow in the other's footsteps, or they could just be the outlier losers of BRK's 2008 portfolio.

Who knows?

 

I don't even know that much about DOW expect that Buffett has always looked down on "complicated chemical operations." Maybe its not that complicated?

 

 

Full disclosure: I'm long GE and looking to get long-er. Immelt seems like an awesome guy, one of my favorite ceos.

[treasurehunt]

zarley,

 

You are right. I was mistaken about the terms of the Swiss Re, DOW and USG deals. The convertibility is nice, but it certainly is not as nice as getting warrants in addition to the annual interest.