Berkshire Hathaway, rated Aa2/AA (Moody's/S&P), has drawn strong demand for its third Global yen bond offering from investors flush with cash at the start of Japan's fiscal year.
The three-tranche ¥160bn (US$1.46bn) SEC-registered senior unsecured offering was smaller than the two previous one by the US conglomerate led by Warren Buffett, which included its previous deal a year ago of ¥195.5bn in seven tranches and a sensational debut of ¥430bn in six tranches in 2019. However, the latest deal was well oversubscribed, according to sources. Bookrunners Bank of America, JP Morgan and Mizuho declined to comment, but a Japanese investor told IFR that books comfortably exceeded the deal size early yesterday.
"Since January, we have been unable to buy new domestic bonds as much as we wanted," a fund manager at a Japanese asset management firm said, describing the recent enthusiasm in the domestic market. "I think those hungry investors bought the Berkshire bonds even at tight levels." The pricing levels looked too tight for the fund manager.
Bankers away attributed the success to Japanese investors' ample cash at the beginning of the new fiscal year. "The size was more than expected, especially for the longer tranches," said a banker away. "Perhaps demand was strong because investors have lots of cash at the beginning of the fiscal year."
Another banker away echoed, saying investor demand has been very strong in many domestic bond deals in the first week of this fiscal year.
Berkshire's new transaction comprised a ¥40bn five-year tranche, an ¥80bn 10-year tranche, and a ¥40bn 20-year tranche. The respective coupons are 0.173%, 0.437% and 0.969%. The spreads over yen mid swaps are 17bp, 30bp and 55bp, all at the tight ends of the initial guidance ranges.
The initial guidance ranges on Monday were 17bp–20bp, 30bp–35bp, and 55bp–60bp and were then revised to 17bp–19bp, 30bp–32bp, and 55bp–57bp Tuesday. The issuer also marketed a 15-year tranche at 40bp–45bp on Monday and 40bp–42bp the following day before dropping it yesterday.
The coupon levels are much the same as the issuer's debut deal two years ago, when a five-year tranche priced with a 0.17% coupon, a 10-year tranche with a 0.44% coupon and a 20-year tranche with a 0.965% coupon. It paid a lot higher coupons last year as that deal priced a few days after the Japanese government declared a state of emergency because of the Covid-19 pandemic.
Berkshire was initially looking to raise in maturities of 10 years and longer, two sources told IFR, but some domestic investors strongly requested a five-year tranche.
Use of proceeds
Use of proceeds from this bond sale is of high interest, especially because Berkshire did surprise the markets in August by announcing it had acquired 5% stakes in each of five major Japanese trading companies – Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo – presumably using the proceeds from the two previous bond offerings. It went on to say that it may increase its holdings up to 9.9% in any of the five firms – a possible sign of more investments in Japanese stocks. However, stock market investors apparently have not done front-running. The five trading firms' share prices dropped up to 5% since the deal was announced, as opposed to near 2% gains in the Nikkei stock index.
The prospectus supplement filed late March does say proceeds will be used for general corporate purposes, including the refinancing of 2.2% senior notes that matured and were repaid on March 15. However, swap market sources said there has been no sign of swapping the proceeds back into US dollars. The five-year USD/JPY basis swaps ended today at –32.75bp, tightening from the –34bp seen prior to the SEC filing.
Rewrites throughout with additional information