Even Buffett hit by higher funding costs

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Berkshire Hathaway, the company led by Warren Buffett, is offering a five-year debt deal for the highest spread over treasurys in its history. As Berkshire is a low-risk AAA company, this fact reinforces the magnitude of credit market dislocations.

Even Warren Buffett can’t escape the credit crunch.

Top-rated Berkshire Hathaway Inc. offered the highest yield over benchmark rates it’s paid to issue $1 billion of five-year debt, according to data compiled by Bloomberg. The company, which gets about 40 percent of its revenue from finance-related businesses, is paying the same spreads as Coca-Cola Enterprises Inc., a bottling company rated six steps lower, paid yesterday.

Even as stocks rally, the Federal Reserve keeps its spigot open to Wall Street and federal regulators act to stop naked short-selling, bond investors aren’t persuaded that the global credit crisis is easing. They’re forcing the best-rated corporate borrowers, especially those tied to the finance industry, to pay the highest yields since the last recession.

“If you’re an issuer that doesn’t have to come to market for a while there’s no reason to pay the price that the market is demanding,” said Scott Schroepfer, a portfolio manager at Riversource Investments in Minneapolis, who helps oversee $100 billion in fixed-income assets.

Companies sold $35.5 billion of bonds in July, the slowest month in at least five years, Bloomberg data show. Sales are down because the risks are growing, with the U.S. speculative-grade default rate forecast to rise to 4.7 percent by the end of the year from 1.92 percent in June, according to Standard & Poor’s.

TED Spread

Banks and brokerages have suffered about $476 billion of losses and writedowns since the beginning of 2007, limiting their ability to extend credit to companies as economic growth slows. Banks remain concerned about lending, money-market rates indicate, raising costs for borrowers.

The difference between the three-month Treasury bill yield and the three-month London interbank offered rate, the so-called TED spread, has risen to 112 basis points from 92 basis points on July 1. The average for the past 12 months has been 128 basis points, compared with 38 basis points for the 12 months before that. A basis point is 0.01 percentage point.

Investors are demanding some of the highest yields relative to benchmark rates on record, pushing average borrowings costs on corporate bonds to a six-year high of 7.66 percent last week, according to Merrill Lynch & Co.’s U.S. Corporate and High Yield Master index. That’s 8 basis points from the most since July 2001, the midpoint of the last U.S. economic recession.

Investment-grade bond spreads average 298 basis points, 7 basis points from the record high reached March 20.

Bloomberg, 30 Jul 2008

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