This transaction is not unlike Buffett’s other well known convertibles he has with companies like GE, Goldman and Bank of America. But unlike those, he along with Prem Watsa, are both common shareholders in USG. The two make up some 22% of the company’s shares and 16% of its debt. The convertible bonds cannot be exercised any sooner than 2013 and with the price of the stock close to $8 a share it makes no sense to do so. At the time the agreement was made in 2009 the stock was also trading close to the $8 mark.
The 10% bonds are the most expensive credit the company has on its balance sheet. In December of 2010 the company borrowed another $350 million in senior notes at a rate of 8.375% and the company has other bonds with rates ranging from 6.3% to 9.75%. The fact that Watsa and Buffett issued the $400 million in unsecured loans and have retained their common equity position speaks to their confidence in the company. A contraction in employment would certainly hurt the company as demand for housing would contract with it. Both Buffett and the economist Robert Shiller have said that falling employment has a much larger impact on housing than rising interest rates on mortgages.
Below is a risk enumerated in USG’s 2010 annual report. I’m not sure I would consider it a risk that the likes of Prem Watsa and Warren Buffett hold a tight grip on the company, but perhaps to some that may be a concern.
“A small number of our stockholders could significantly influence our business and affairs.
Based on filings made with the SEC and other information available to us, we believe that, as of January 31, 2011, seven organizations collectively controlled over 50% of our common stock. Also, all of our 10% convertible senior notes are currently held by two of our largest stockholders. At the current conversion price of $11.40 per share, the notes are convertible into approximately 35.1 million shares of our common stock, or approximately 25% of the shares that would be outstanding if all of the notes were converted at that price. Accordingly, a small number of our stockholders could affect matters requiring approval by stockholders, including the election of directors and the approval of potential business combination transactions.”
Disclosure: Long USG
Josh Zachariah - for a list of earlier USG articles