By Andrew Frye and Shannon D. Harrington
Feb. 23 (Bloomberg) -- Warren Buffett’s name in credit markets is stronger than it’s been since 2008 as debt investors defied downgrades to his Berkshire Hathaway Inc. and pushed down the price of default protection on the firm.
Berkshire credit-default swaps fell to the lowest in 17 months, ending at 128.1 basis points yesterday in New York, according to CMA DataVision prices. The swaps reached 127.6 on Sept. 22, 2008. That compares with 130.4 on Feb. 19 and 525 basis points on March 5, 2009. A rising stock market in the final nine months of 2009 boosted Berkshire’s results, allowing investors to look beyond the three AAA ratings the company lost in the last year.
“The market’s increasingly recognizing the fundamental creditworthiness of Berkshire,” said Bill Bergman, an analyst with Morningstar Inc. “They’ve cemented their position in the marketplace.”
Berkshire recovered from a $1.5 billion loss in the first quarter of 2009 as the Standard & Poor’s 500 Index surged 40 percent in the last nine months of the year. Berkshire’s stock portfolio increased to more than $55 billion, and the company’s liability fell for multiyear bets it made on the direction of world equity markets. Buffett didn’t reply to a request for comment left with his assistant, Carrie Kizer.
The cost to protect against corporate bonds dropped since March 2009, after the Federal Reserve and U.S. government spent, lent or committed $11.6 trillion to stabilize credit markets and pull the economy out of recession. Banks that suffered after the 2008 Lehman Brothers Holdings Inc. bankruptcy got a lifeline with the Troubled Asset Relief Program. Berkshire, whose main business is insurance, didn’t take a bailout.Berkshire Fared Bettter
“Spreads have tightened dramatically across the finance sector from last year’s widest levels,” said Kathleen Shanley, a debt analyst at Chicago-based research firm Gimme Credit LLC. “Berkshire Hathaway fared better than most in the crisis and was able to seize on some profitable opportunities.”
The Markit CDX North America Investment Grade Index, a benchmark for credit-default swaps that is linked to 125 companies in the U.S. and Canada, has dropped 171 basis points since March 9, 2009, to 91 basis points, CMA prices show, and last month reached the lowest since December 2007.
Credit swaps on Berkshire, which traded lower than the index in the three years before October 2008, are trading about 37 basis points wider than the index, CMA prices show.
Buffett, the second-richest American, positioned Berkshire to weather the contraction in the U.S. economy by stockpiling $44 billion in cash. Starting in 2008, when corporate borrowing costs surged, he drew on that hoard to finance Goldman Sachs Group Inc., General Electric Co., Swiss Reinsurance Co. and the Mars Inc. takeover of chewing-gum maker Wm. Wrigley Jr. Co.Railroad Acquisition
Those transactions are paying coupons that helped boost investment income in the first nine months of last year. This year, Buffett acquired railroad Burlington Northern Santa Fe Corp. for $27 billion, the biggest takeover of his four decades as Berkshire’s chief executive officer. He raised funds for that deal by selling $8 billion of bonds.
“His most recent purchase was the railroad, which is certainly less risky than financial” companies, said Arthur Cohen, a Berkshire investor at Arthur M. Cohen & Associates LLC.
Standard & Poor’s downgraded Berkshire this month, following cuts by Fitch Ratings and Moody’s Investors Service, leaving Buffett’s firm without a top grade at any of the three biggest credit-rating companies.
Credit-default swaps, used to hedge against losses or to speculate on the ability of companies to pay debt, rise as investor confidence deteriorates. A basis point on a credit- default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.
Buffett, who has a reputation as the world’s pre-eminent stock picker, struck deals with unidentified firms to protect them against long-term declines in four equity indexes. Berkshire’s liabilities on those positions narrowed to about $8 billion as of Sept. 30 from $10.2 billion six months previous.
--With assistance from Jamie McGee in New York. Editors: Dan Reichl, Dan Kraut.
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