Oxy Pref

[ValueMaven]

This is not an insignificant investment for Omaha.  Wouldn't touch the stock (OXY) - but I'd imagine Omaha is breathing easier with the common shares more then doubling over the last month or so.  Has anyone tried to triangulate a fair-market value for these?  I guess you'd have to look at a blend of debt and equity to come-up a reasonable valuation.  I'd be interested to see how OXY continues to pay BERK - either in cash, or stock going forward. 

[thepupil]

https://www.bamsec.com/filing/156459020052144?cik=1067983

 

see page 21,

9/30, berkshire valued the pref at $8.1B and the warrants at $1.5B

6/30 this was $7.8B (roughly same on warrants)

3/30 this was $5.5B ($2.3B on warrants, higher because of higher vol input i guess even though their likelihood of being ITM was lower in March)

 

Right now, I'd guess the pref is worth par (OXY 2049's yield 5.5% so 2.5% pick up for being subordinated / not transferable / not cash pay seems fair = 8% = fair = pref worth par), too lazy to value the warrants.

 

the callability in 10 years at $105 caps how much more than par the pref can be worth, making it have less convexity than a long duration fixed income investment. because of this and the subordination, i could hear an argument for lower (80-90 cents?) but who knows.

[Xerxes]

Why BRK didn’t insist on getting cash only as interest payment when it invested in preferred ?

[ValueMaven]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

[thepupil]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

 

I think the option to pay in stock is good from a credit perspective as it gives OXY a way to issue equity in bad times and probably allows OXY to argue that the interest on the prefs need not be included in any kind of credit metric, just a speculation, no basis in fact for this, i feel like 5XEBITDA would know this.

[5xEBITDA]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

 

I think the option to pay in stock is good from a credit perspective as it gives OXY a way to issue equity in bad times and probably allows OXY to argue that the interest on the prefs need not be included in any kind of credit metric, just a speculation, no basis in fact for this, i feel like 5XEBITDA would know this.

 

Whether or not pref-related interest is included in a credit metric covenant would be laid out in the Company's credit agreement / indenture, but most likely the CA. If I had to guess, it won't be included because 1) interest can be toggled between cash and stock, and 2) pref is only debt-like and not a true loan or bond, and most financial covenants only seek to govern metrics related to pure debt securities. I haven't looked at OXY, but would be surprised if the pref can freely opt between paying cash or stock with no other penalties. I've heard of prefs / converts with structures like this, but in practice they're rare. Even rarer are those that promise cash but can jam you with stock upon maturity, but have seen.

[gfp]

Berkshire has settled on this exact formula for preferred investments over the years because it allows the investee to count the investment as equity.  They modified the BAC pref after the fact to make it quasi-perpetual to make sure it continued to count toward capital with regulators.  There is always a penalty for paying in stock, a slight (~10%) discount to VWAP leading up to dividend and/or a bump-up in rate (~50-100 bps).  I would assume the idea is that this would allow Berkshire to liquidate the dividend stock at about the cash value of what would have been the cash dividend payment.  This is what they did with OXY the one quarter OXY paid in stock.  And since the stock dividend is based on the VWAP for some known number of days leading up to the dividend payment, Berkshire can - and sometimes does - pre-sell the stock they are set to receive so they end up with essentially a zero position on the day of the payment.  With little risk since VWAP is something Berkshire can ask for each day with their brokers.

 

Berkshire has been doing these deals for so long it has become a formula where they can just tell MT&O to write it up boilerplate.  "give 'em the Goldman with the Dow Chemical twist" or whatever

 

Exceptions would be the sole-lender stuff like Lee Enterprises or SRG.  Those are structured totally differently and the Lee loan has an interesting variation of the Net Worth Sweep, where Lee has to pay down principal anytime they are left with over $20 million cash at the end of a quarter.