Berkshire Hathaway brings first high-grade sale of year; Bank of America firms on settlement

By Andrea Heisinger and Cristal Cody

New York, Jan. 3 - The first high-grade bond sale of the year came from Berkshire Hathaway Finance Corp. on Monday.

The $1.5 billion deal was initially announced in two tranches, but some three-year floating-rate notes were added to go along with three-year fixed-rate notes and 10-year notes.

Despite the debt's high ratings, the three-year notes priced at twice the coupon of the record low 0.75% set by both Wal-Mart Stores Inc. and Coca-Cola Co. in late 2010.

"I don't think they were going for a low," a source away from the deal said.

The lone sale of the day was more than most desks were expecting.

"I didn't think there would be anything in the market to be honest," one syndicate source said. "We were all expecting everything to go tomorrow."

The Berkshire sale was also expected to price on Tuesday, but the company ended up jumping in after the market tone was deemed positive in the morning, a source who worked on the sale said.

The source added that they were "hearing a lot of chatter that Tuesday and Wednesday will be busy."

In the secondary market, bonds traded "all over the place" as investors and traders returned from the long holiday break, a source said.

"Everyone's just getting back into the office and churning out runs and figuring out where everything's at."

The new debt from Berkshire Hathaway Finance was active late in the secondary market after pricing, while Bank of America Corp.'s bonds came in 15 basis points after the bank agreed to settle claims with Fannie Mae and Freddie Mac over the sale of bad mortgages, traders said.

High-grade bonds in the telecommunications sector also narrowed in trading, according to a source.

"There was a strong tone coming in this morning," a trader said. "We're coming off it a little bit but still closing the day probably 3 to 5 better."

The Markit CDX Series 14 North American investment-grade index closed Monday 2 bps tighter at a spread of 83 bps, according to Markit Group Ltd.

Volume was "creeping back up" by the afternoon, a source said.

Overall investment-grade Trace volume was only about $1.5 billion on the last trading day of the year on Friday, a market source said. Volume on Monday rose to about $10.5 billion.

U.S. government debt fell, sending yields up on the long end of the curve late Monday in the first trading day of the new year.

The 10-year benchmark note yield rose 5 basis points to 3.33%. The 30-year bond yield rose 7 bps to 4.4%.

Berkshire's three tranches

Berkshire Hathaway Finance sold $1.5 billion of senior notes (Aa2/AA+/A+) in a reallocated three tranches by late afternoon, a market source close to the deal said.

Demand was about $3.5 billion across all of the tranches, she said. The 10-year notes took up about half of that and the rest of the books were split about evenly between the shorter three-year fixed- and floating-rate tranches.

There was a $375 million tranche of three-year floating-rate notes priced at par to yield Libor plus 33 bps. This was within price guidance of Libor plus 30 bps to 35 bps.

A second tranche was $375 million of 1.5% three-year notes priced at a spread of 58 bps over Treasuries. This was at the tight end of price talk in the 60 bps area, a source said.

The final part of the sale was $750 million of 4.25% 10-year notes sold at a spread of Treasuries plus 95 bps. This tranche also came in at the tight end of guidance in the 100 bps area.

Bookrunners were Goldman Sachs & Co., J.P. Morgan Securities Inc. and Wells Fargo Securities LLC.

Proceeds are being used to satisfy and retire existing debt.

The deal is guaranteed by Berkshire Hathaway Inc.

Although the bonds priced late in the day, two of the tranches were active soon after in the secondary market, traders said.

The notes due 2021 were seen by one source at 90 bps on the offer side.

A trader on another desk saw the 10-year notes at 95 bps bid, 91 bps offered.

The tranche of notes due 2014 was quoted tighter at 55 bps bid, 52 bps offered.

The holding company for financial, insurance and transportation subsidiaries is based in Omaha.

Financials, BofA firm

The financial sector overall firmed in secondary trading on Monday on the news that Bank of America had agreed to pay $2.8 billion to settle claims with Fannie Mae and Freddie Mac.

"Bank of America is 15 basis points better across the whole curve," the trader said. "Financials are closing 5 to 10 better."

Bank of America's 7.625% notes due 2019 closed out Monday at 200 bps, compared to trading at 224 bps in the pre-holiday market in December, a source said.

The Charlotte, N.C.-based bank's settlement involving its unit Countrywide Financial is far lower than what was expected, with some settlement expectations as high as $10 billion.

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