By Erik Holm and Gabrielle Coppola
April 2 (Bloomberg) -- Billionaire Warren Buffett’s Berkshire Hathaway Inc. is being penalized in the bond market, paying more to borrow than bailed-out companies including Citigroup Inc.
Buffett’s firm paid more for its latest debt offering than Fannie Mae and Freddie Mac, the mortgage lenders that lost a combined $108.8 billion last year. Bank of America Corp. is also paying lower interest on notes under a program in which the U.S. agrees to guarantee debt.
The difference in borrowing costs illustrates how government aid is giving an advantage to companies that needed multiple helpings of U.S. rescue funds. Each of the companies except for Berkshire were able to find buyers for notes paying 2.375 percent or less because of their government backing, while Berkshire will pay 4 percent to bondholders who bought $750 million of the firm’s AAA-rated debt last week.
“Highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels,” Buffett said in his annual letter to shareholders on Feb. 28. “At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
Opponents of the bailout efforts have seized on such disparities as an indication that the government is rewarding bad behavior. Buffett has said he supported the U.S. government’s actions, given the extent of the recession and a financial crisis that cut off some borrowers’ access to credit.
‘Weak Players’
“This is the cost of the intervention,” said Bill Bergman, an analyst with Morningstar Inc. who follows Berkshire. “The government is propping up the weaker players, not the strong ones.”
Danielle Romero-Apsilos, a Citigroup spokeswoman, and Scott Silvestri of Charlotte, North Carolina-based Bank of America, declined to comment. Freddie Mac’s Michael Cosgrove said that while his company gets favorable rates in the bond market because of U.S. guarantees, the firm is paying a 10 percent dividend to the government on its investment in preferred shares. Fannie Mae’s Terence O’Hara declined to comment.
Berkshire’s three-year notes sold March 26 were priced to yield 282 basis points more than similar-maturity U.S. Treasuries. Proceeds will be used to make loans to people who buy pre-fabricated houses from Berkshire’s Clayton Homes Inc. unit. A basis point is 0.01 percentage point.
The same day, McLean, Virginia-based Freddie Mac raised $8 billion, including $5 billion of two-year, 1.625 percent debt that priced to yield 71 basis points more than Treasuries.
Freddie, Fannie
Freddie lost about $50 billion in 2008 and Fannie booked $58.7 billion in losses. The firms yesterday disclosed a $15.2 billion investment by the Treasury in Fannie’s preferred stock and a $30.8 billion purchase of Freddie’s preferred shares.
Citigroup last week raised $7 billion of debt guaranteed by the Federal Deposit Insurance Corp., including $1 billion of 3- year notes with a two percent coupon, Bloomberg data show.
New York-based Citigroup paid 86.6 basis points more than similar-maturity Treasuries on the debt.
Bank of America sold $2 billion of three-year, 2.375 percent notes on March 9 that priced to yield 102.5 basis points more than benchmarks, Bloomberg data show.
“Lousy businesses have a cheaper cost of funds right now because the government doesn’t want them to go away,” said Larry Coats, the chief executive officer of Oak Value Capital Management Inc., which owns Berkshire shares. “The good news for Berkshire is, they also are finding very attractive ways to put their money to work.”
Motorcycles, Rings
Buffett has made deals to buy debt in firms including motorcycle-maker Harley-Davidson Inc., luxury jeweler Tiffany & Co. and Sealed Air Corp., the maker of Bubble Wrap shipping products, commanding yields as high as 15 percent.
While companies like Berkshire have to face the credit markets without the government standing behind them, they have also indirectly benefited from the U.S. guarantee of debt issued by troubled banks, said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York.
The government “certainly unclogged the bottleneck that was keeping deals from getting done” throughout the corporate bond market, he said.
The government guarantee lowered the risk of default on bank debt, making yields on the securities too low for traditional buyers of corporate bonds, clearing the way for other companies to fill the void.
Sales of non-financial company debt surged to a record $181 billion last quarter, as investors sought higher-yielding corporate bonds to fill the void left by government-backed bank debt.
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