According to a report published this morning, J.P. Morgan analysts believe that Swiss Re will be in a position to pay back its CHF 3.6 billion loan from Berkshire Hathaway as soon as June 2010. We originally discussed the terms of Berkshire’s investment in Swiss Re last March shortly after the transaction was finalized.
To briefly summarize, the terms of the funding included a 12% fixed interest rate and gave Swiss Re the right to defer interest payments for an additional fee of 15% per annum on the deferred interest. Berkshire has the right to convert the loan into Swiss Re common shares starting three years after the issue date at CHF 25 per share which is far below the current quotation.
In exchange for repaying the security early and eliminating Berkshire’s right to convert into common shares, Swiss Re must pay a 40% premium over face value if the repurchase occurs prior to the second anniversary of the transaction.
Berkshire’s latest quarterly report contains the following summary:
On March 23, 2009, Berkshire acquired a 12% convertible perpetual capital instrument issued by Swiss Re at a cost of 3 billion Swiss Francs (“CHF”), which is also the face amount of the instrument. The instrument has no maturity or mandatory redemption date but can be redeemed under certain conditions at the option of Swiss Re at 140% of the face amount until March 23, 2011 and thereafter at 120% of the face amount. The instrument possesses no voting rights and is subordinated to senior securities of Swiss Re as defined in the agreement. Beginning March 23, 2012, the instrument can be converted at Berkshire’s option into 120,000,000 common shares of Swiss Re (a rate of 25 CHF per share of Swiss Re common stock).
Based on these terms, Swiss Re will have to pay a CHF 1.2 billion premium if the company elects to repay the loan in June 2010. The Swiss Re investment appears to represent another case where Warren Buffett skillfully deployed capital at a time when few players were willing or able to make investments.
The author owns shares of Berkshire Hathaway.