Standard & Poor’s Ratings Services has placed its ratings on Berkshire Hathaway Inc. (BRK) and various affiliates on CreditWatch with negative implications following the company’s announcement that it will acquire Burlington Northern Santa Fe Corp. (BNSF).
S&P noted that the “transaction is valued at approximately $44 billion, including the assumption of approximately $10 billion of BNSF debt, making it BRK’s largest acquisition to date. BRK already owns nearly 23 percent of the stock of BNSF. The acquisition of the remaining shares will be financed with a combination of 60 percent cash and 40 percent through the issuance of new BRK shares.
S&P said it “expects that a significant part of the cash portion will come from BRK’s core insurance operations, as has historically been the case in other transactions.” As a result, credit analyst John Iten explained: “We believe that this transaction will decrease the liquidity and capital adequacy of the insurance operations. For the consolidated organization, financial leverage will increase and fixed-charge coverage may decline.”
In addition S&P noted that the “capital adequacy of the insurance operations has declined over the past year, reflecting the drop in the market value of BRK’s extensive portfolio of equity holdings, which the insurance subsidiaries hold. This was the primary reason for our decision to change the outlook on all BRK ratings to negative from stable on March 24, 2009 (see research update).
“Moreover, the insurance operations over the past 12 months have been the buyers of BRK’s well-publicized investments in Goldman Sachs, General Electric Co., WM. Wrigley Jr. Co., and Swiss Re.”
In S&P’s analysis, although these “large investments have attractive coupons and are boosting investment income,” they have also “increased the exposure of the insurance companies’ statutory capital to equities and speculative-grade bonds.”
The investments have also “reduced insurance company liquidity,” S&P continued, “as BRK paid for them primarily out of cash and short-term investments and not from the sale of longer-term investments.
In addition S&P pointed out that the insurance companies “already own a substantial amount of BNSF stock, so any further share purchases will increase the concentration risk associated with having a substantial portion of invested assets in securities of one company.”
As the full details of this transaction become available, “we will evaluate the impact on the liquidity and capital adequacy of the insurance operations, as well as the implications for liquidity, earnings, financial leverage, and fixed-charge coverage of the consolidated organization and the holding company,” S&P concluded.
“We expect to complete our analysis and remove the company from CreditWatch within 90 days. We currently expect that any ratings change would be by no more than two notches.”
Source: Standard & Poor’s — www.standardandpoors.com
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