Burlington Northern completed the sale of $750 million in new bonds on September 8 in two tranches.  The company issued $250 million 3.6% coupon ten year notes at 99.868 to yield 3.616% and $500 million 5.05% 30 year bonds at 99.631 to yield 5.074%.  The size of the overall deal was increased from an originally planned $500 million.  The ten year note was priced to yield 100 basis points over the ten year treasury while the thirty year bond was priced to yield 140 basis points over the thirty year treasury bond.

Burlington Northern was acquired by Berkshire Hathaway earlier this year.  Berkshire does not guarantee any of Burlington Northern’s debt.  For more details, please refer to the offering document filed with the SEC.

According to the SEC filing, Burlington Northern will use the funds “for general corporate purposes, which may include but are not limited to working capital, capital expenditures, and repayment of outstanding indebtedness.”  Matthew Rose, CEO of Burlington Northern, has previously indicated that the company is planning to accelerate capital expenditures with funds that were previously used for dividends and share repurchases.

In light of prior statements regarding accelerated capex, it was somewhat surprising to find that Burlington Northern paid a $250 million dividend to Berkshire during the second quarter.  The combination of the dividend and the new funds raised in the debt offering may simply indicate that management believes that interest rates are low enough to warrant an increase in leverage. The logic is hard to argue with given historically low interest rates on treasuries and the modest spread above treasuries that Burlington Northern paid even without a Berkshire guarantee.

Burlington Northern is not alone in pursuing a strategy to take advantage of historically low interest rates.  Norfolk Southern recently issued “century bonds” yielding 5.95 percent.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.

Burlington Northern Sells $750 Million in New Bonds
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