Warren Buffett’s Masterful Use Of Debt

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During their latest episode of the VALUE: After Hours Podcast, Morris, Taylor, and Carlisle discuss Warren Buffett’s Masterful Use Of Debt. Here’s an excerpt from the episode:

Jake: Now, their use of debt is masterful. That’s something that I think that’s really missed when you look at the capital allocation of Berkshire. Right now, I think the average is around the 3%, and it’s all long dated, fixed. Some of it, the Japanese stuff, the yen is zero forever. Free money, basically.

Tobias: Who took the other side of that trade?

Jake: I don’t know. Some banks.

Tobias: Japanese insurers.

Jake: He executed it when the yen was especially weak. His dollars translated into– He just knows how to play this game so well. It’s just amazing to watch a master at work. But they’ve got, let’s say, what is it, $76 billion at the railroad in debt, $46– at railroad and energy. That’s actually regulatory required. The commissions that they operate under want them to have debt to lower the cost of capital that they are then paying on for when they figure out how much to pay like a return on equity for them. So, they want them to have some debt because it lowers the cost of capital for these companies.

But then, the insurance side of things in corporate level, they’ve got $46 billion. And then, something else you don’t really talk about much is the deferred tax liability is $77 billion. So, you could think about that as an interest-free, no expiration, non-callable loan from the US government of $77 billion that they’re running with. So, Buffett continues to be a master. There’s nobody better doing it. I just marvel at the artistry of it.

Alex: I like the float comment, 2011, 2012, “Hey, probably won’t grow from here. Could fall 2%, 3% a year,” or whatever it was. It’s [crosstalk] [laughs]

Jake: Or not. Yeah. Well, it doesn’t hurt. They added another– How much did they get? Maybe $20 billion, I think, in float from the Allegheny transaction. So, there’s some of that inorganic, but it still counts. Still float.

Alex: Yeah.

Jake: And now imagine taking those bonds and converting– because they can probably free up a fair amount of capital now, because Berkshire is so overcapitalized that now Allegheny doesn’t have to have as much tied up in 3% bonds or something. And now, they could make that into equities more. So, imagine what that float’s worth all of a sudden.

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