Berkshire stock the only one it considered as underlying asset for zero-strike warrants.

EVEN superstar investor Warren Buffett is not impervious to the ravages of the global financial crisis. According to Forbes’ latest annual ranking of billionaires, the Oracle of Omaha is no longer the world’s richest man after his net worth shed almost 40% from a year ago.

This is largely because the market value of his listed investment vehicle, Berkshire Hathaway Inc, has shrunk by more than a third over the last 12 months.

On March 12, Fitch Ratings stripped Berkshire of its AAA rating due to the worry that its exposure to derivatives may hurt its profitability. Two weeks later, Standard & Poor’s said it might downgrade its rating on Berkshire from the current AAA in the next 12 months.

Despite all these, Buffett’s reputation as a great stock picker remains intact and Berkshire continues to be a highly-regarded stock.

If a person is going to bet on the performance of just one company anywhere in the world in these uncertain times, there is more than an even chance that he will choose Berkshire.

As such, when AmInvestment Bank Bhd wanted to come up with the maiden issue under its zero-strike warrants programme, there was no need to brainstorm over the choice of the underlying asset. The Berkshire stock was the only one considered.

“What else? It’s the obvious choice, tantamount to the blue chip of the blue chips,” says AmInvestment director and head of equity derivatives Ng Ee Fang.

“We’re not here to give investment advice as to Berkshire, but we picked it because we think that it is a good choice for investors looking to participate in the consumer and global recovery story over the next five years.”

The investment bank is offering up to 100 million zero-strike warrants over the Class B ordinary shares of Berkshire at RM1 each.

The pricing is a key factor because it means investors can ride on the Berkshire stock performance at a fraction of the cost of actually buying the stock.

The zero-strike warrants were launched on March 12 and the offer period closes on April 10.

The value and voting rights of Berkshire’s B shares are 1/30 and 1/200 those of A shares. In addition, the A shares can be converted into B shares, but not the other way round.

On April 1, the A and B shares closed at US$87,600 and US$2,819.

“It is one of the most expensive US stocks. Most people want a piece of it, but the pricing is prohibitive, at a minimum investment of approximately US$28,000 for 10 B shares,” says Ng.

“With the crisis, comes opportunity. It has always had a premium attached to the name, but for the first time since the dotcom boom/bust, the market price is close to book value per share.”

When it comes to assessing Berkshire, its book value per share is an important indicator because of its collection of about 70 businesses, including household names such as Coca-Cola, American Express and Kraft Foods.

The diversity of the company’s investment holdings is also seen as a plus.

“We think that he (Buffett) has a road map to survive and profit from this crisis. We think the ratings issue is not going to impact the performance of Berkshire over the next five years,” adds Ng.

“Everyone says most assets out there are at 10-year lows and are 30% off their peaks. And this guy has got 70 bellwethers in Berkshire itself. So it’s an all-in-one.”

The term ‘zero-strike’ refers to the fact that the exercise price (or strike price) is set at zero.

The Berkshire zero-strike warrants mature five years from the issue date, and are automatically converted to pay out the performance of the B shares during the tenor.

The payout will match the final price of the B shares after adjusting for currency and the exercise ratio.

To be determined on April 13, the exercise ratio indicates how many warrants are referenced to one underlying share.

The five-year tenor is the maximum allowed under the Securities Commission’s guidelines for call warrants.

However, Buffett is famously known for taking a long-term position on his investments.

Ng says there is no mismatch here. “The tenor is coincidentally in line with his current investment outlook. It seems like Warren is actually doing our marketing for us,” she explains.

“In a recent CNBC interview, Buffett was asked how long it would take for the global economy to pull itself out from this crisis. He says it will be fine in five years. So we were like, ‘Thank you, Warren.’”

(When asked on the CNBC show last month on where he thought the US unemployment rate was heading, Buffett said, “It’s probably going to go a fair amount higher, but on the other hand, five years from now I can guarantee you that the machine will be running fine, but I’d like to get there a lot faster than five years. And we can.”)

Even with Buffett’s unwitting assistance, AmInvestment Bank has more work to do to make the zero-strike issue a success.

For one thing, it has to educate people on the difference between the zero-strikes and other call warrants. In the past, investors have been burnt after investing in the latter due partly to a poor understanding of the products.

It also has to address the negative perception – Ng calls it “a derivative taint” – towards derivatives. That is why the investment bank has opted for a 30-day offer period instead of the usual two days for most call warrants.

“The usual call warrant programme is more for active, sophisticated investors who want to take a leveraged participation in the underlying stocks.

“The zero-strike suits a different profile. Typically, the tenor is longer. So we’re going for somebody who wants to invest but just doesn’t have the time or the sophistication,” she says.