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GS, GE and BAC warrants on balance sheet


valueinvesting101
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How are these warrants valued on Berkshire's balance sheet? I think they might have been marked at zero considering conservative approach.

Will any of these be will be converted to common? GS and GE are expiring in less than year. Long time to go for BAC and considering dividend adjustment I hardly doubt WEB will convert BAC warrants into common as yet.

 

 

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How are these warrants valued on Berkshire's balance sheet? I think they might have been marked at zero considering conservative approach.

Will any of these be will be converted to common? GS and GE are expiring in less than year. Long time to go for BAC and considering dividend adjustment I hardly doubt WEB will convert BAC warrants into common as yet.

 

Can't speak for the accounting, I would assume black & sholes would be used, I think that is what is used for the index puts. From what I remember WEB has said he would exercise the GS warrants sometime in 2013 a few months before expiration. AFAIK the GE ones are still under water right? I thought they were 25 strike. I don't know if he has commented on the BAC warrants.

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In fact, the GE warrants are priced at $22.25, so they show nearly $1 billion in profit from the $3 billion loan.  Very nice return indeed given the 10% interest.  Assuming GE's pricing holds up, it will be interesting to see if BRK buys and holds the stock (perhaps hoping for dividend growth) or sells the options.  GS options have hovered around par.  That will be interesting to watch over the next 10 months or so.

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In fact, the GE warrants are priced at $22.25, so they show nearly $1 billion in profit from the $3 billion loan.  Very nice return indeed given the 10% interest.  Assuming GE's pricing holds up, it will be interesting to see if BRK buys and holds the stock (perhaps hoping for dividend growth) or sells the options.  GS options have hovered around par.  That will be interesting to watch over the next 10 months or so.

 

What exactly do you mean by "nearly $1 billion in profit from the $3 billion loan"? GE stock is trading at $21.20 or so, which is well under the strike price of the warrants.

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The warrants are valued based on Black-Scholes and reflected in "Other Investments," along with the preferred shares.  When the original deals were made, the warrants were valued under Black-Scholes and the remainder of the deal value was applied as the cost basis on the preferred.  You can see this treatment when GS paid their preferred back.  BRK's cost basis on the Pref. was not $5 Billion - it was quite a bit lower because "free" warrants don't exist in accounting.  They have value and the total cost basis has to be divided between the two securities.

 

xo 1 - Even when a warrant is out of the money, it can still have significant value.  Out of the money doesn't equal zero value.

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Speaking of Berkshire's BAC warrants - Many on this board and elsewhere have claimed that they contain similar strike price adjustments following a BAC dividend raise.  I have not been able to find language in the purchase agreement that backs this up.  My belief is that they do not adjust except for major dilution or for any share issuance much below 7.14.  Just standard dilution adjustments.

 

If anyone can prove they adjust from quarterly dividends like the TARP variety, I would love to know.

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In fact, the GE warrants are priced at $22.25, so they show nearly $1 billion in profit from the $3 billion loan.  Very nice return indeed given the 10% interest.  Assuming GE's pricing holds up, it will be interesting to see if BRK buys and holds the stock (perhaps hoping for dividend growth) or sells the options.  GS options have hovered around par.  That will be interesting to watch over the next 10 months or so.

 

Yup, poor choice of words on my part. I should have said out of the money not "under water". Hard to be under water on a deal kicker.

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The warrants are valued based on Black-Scholes and reflected in "Other Investments," along with the preferred shares.  When the original deals were made, the warrants were valued under Black-Scholes and the remainder of the deal value was applied as the cost basis on the preferred.  You can see this treatment when GS paid their preferred back.  BRK's cost basis on the Pref. was not $5 Billion - it was quite a bit lower because "free" warrants don't exist in accounting.  They have value and the total cost basis has to be divided between the two securities.

 

xo 1 - Even when a warrant is out of the money, it can still have significant value.  Out of the money doesn't equal zero value.

 

Ah did not know that about the accounting. I assumed the prefs had a cost basis of par and the warrants would have a cost basis of the BS value at time of issue. Thanks for pointing that out.

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In fact, the GE warrants are priced at $22.25, so they show nearly $1 billion in profit from the $3 billion loan.  Very nice return indeed given the 10% interest.  Assuming GE's pricing holds up, it will be interesting to see if BRK buys and holds the stock (perhaps hoping for dividend growth) or sells the options.  GS options have hovered around par.  That will be interesting to watch over the next 10 months or so.

 

I remember that BRK sold/trimmed GE common -- maybe it's not Buffet's doing.

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Here is the link for agreement:

http://www.sec.gov/Archives/edgar/data/70858/000119312511232422/dex11.htm

 

Checkout 13. Adjustments and Other Rights. Page 7 onwards.

 

Yeah those warrrants can build very big position in BAC for Berkshire. 700 million warrants but at strike of 7.14( $7.142857 to be precise) with dividend adjustments expiring in 2021. WEB really killed it.

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The amazing thing is that over the next decade or two, BRK's position in BAC (after WEB exercises the warrants) will likely start to creep up towards the 10% limit, as BAC buys back their stock. 

 

This could possibly be the best "WEB stamp of approval" investment that BRK ever makes!

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Here is the link for agreement:

http://www.sec.gov/Archives/edgar/data/70858/000119312511232422/dex11.htm

 

Checkout 13. Adjustments and Other Rights. Page 7 onwards.

 

Yeah those warrrants can build very big position in BAC for Berkshire. 700 million warrants but at strike of 7.14( $7.142857 to be precise) with dividend adjustments expiring in 2021. WEB really killed it.

 

So can you quote language from that section that says the warrant strike price adjusts with ordinary dividends?  I don't see it.  Do you?

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  • 3 months later...

Found this interesting in the 10-K

 

Other investments:

       

 

Preferred stocks

  $ 11,860     Expected duration                                                                   10 years

    Discount for transferability restrictions and subordination   97 basis points

 

Common stock warrants

    3,890     Discount for transferability and hedging restrictions           19%

 

 

So BRK is valuing the preferred with a ~1% discount which would compound over 10 years and marked down their warrants by 19%.  So that's some extra value imo.

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