Berkshire Hathaway Loses ‘AAA’ Ratings from S&P

February 5, 2010

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit rating on Berkshire Hathaway Inc. (BRK) to ‘AA+’ from ‘AAA’. S&P also lowered its financial strength ratings on BRK’s core insurance operations to ‘AA+’ from ‘AAA’.

Concurrently, S&P removed the ratings from CreditWatch, where they were placed with negative implications on Nov. 4, 2009. The outlook is stable.

“We are taking these rating actions in anticipation of BRK’s acquisition of Burlington Northern Santa Fe Corp., which we expect to close no later than Feb. 15,” stated credit analyst John Iten.

The transaction is BRK’s largest acquisition to date. The company already owned more than 22 percent of the stock of Burlington Northern Santa Fe. S&P noted that “BRK will finance the acquisition of the remaining shares for about $26 billion with a combination of 60 percent cash and 40 percent through the issuance of new BRK shares. The cash portion of about $16 billion will come from cash on hand and new debt issuance of approximately $8 billion.”

In addition S&P said it expects that “a significant part of the internal cash will come from BRK’s core insurance operations, as has been the case in other transactions.”

Iten explained that S&P’s rating actions “are based on our view that Berkshire’s overall capital adequacy, as well as that of its insurance operations, has weakened to levels no longer consistent with a ‘AAA’ rating and is not expected to return to extremely strong levels in the near term. Furthermore, we expect that the consolidated liquidity position of BRK will be reduced from extremely strong historical levels as a result of the acquisition.”

S&P also indicated that as “capital adequacy and liquidity levels have declined, investment risk remains very high in our view, compounding the need for extremely strong capital and liquidity given potential investment volatility. A key concern is that BRK’s risk tolerances appear to have increased, yet we believe they remain ill defined while the organization increases in complexity.”

On a more positive note S&P pointed out that BRK’s earnings “remain very strong,” and are forecast to increase following the acquisition of BNSF. S&P anticipates that BRK will “use these incremental earnings and cash flows to pay down the debt resulting from the acquisition rather than rebuild insurance company capitalization. We view BRK as having an extremely strong and well diversified competitive position across its business. Albeit weakened, we view the company’s liquidity position and balance sheet as still very strong. However, we see meaningful exposure to adverse development of reserves held for long-term insurance liabilities, and uncertainty remains regarding management succession.”

S&P’s analysis also mentioned the “uncertainty surrounding management succession and management structure, corporate culture, and business strategy following an eventual transition of the company’s leadership from current CEO Warren Buffett,” as an “ongoing concern.”

In S&P’s opinion the situation “is only partially mitigated by a board-approved succession plan and the experienced management teams in place at the operating companies, given Mr. Buffett’s strong and positive influence on all aspects of operations at Berkshire.”

Source: Standard & Poor’s –

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