Nov. 4 (Bloomberg) -- Warren Buffett’sBerkshire Hathaway Inc. is more likely to be stripped of its AAA rating by Standard & Poor’s after the company agreed yesterday to pay $26 billion to acquire railroad Burlington Northern Santa Fe Corp.

“This transaction will decrease the liquidity and capital adequacy of the insurance operations” at Omaha, Nebraska-based Berkshire, the ratings company said in a statement today placing Buffett’s firm on “CreditWatch with negative implications.”

Berkshire lost the top grade from Moody’s Investors Service and Fitch Ratings earlier this year as declines in the value of derivatives tied to stock markets contributed to the company’s first quarterly loss since 2001. Buffett’s insurance units scaled back catastrophe coverage this year to protect capital.

S&P said it expects to complete its review within 90 days. On March 24, the ratings firm lowered its outlook on Berkshire to “negative” from “stable,” signaling it may be cut within two years. Buffett, Berkshire’s chairman and chief executive officer, didn’t immediately respond to a message seeking comment left with his assistant Carrie Kizer.

Berkshire Hathaway’s 5.4 percent notes due in 2018 fell 0.4 cent to 106.1 cents on the dollar as of 1:09 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities yield 4.5 percent.

Berkshire’s Debt

Berkshire will take on $10 billion in net debt as part of the acquisition of the Fort Worth, Texas-based railroad for $100 a share. Buffett, whose firm already owns more than 20 percent of Burlington, described the deal as an “all-in wager on the economic future of the United States.”

Buffett has drawn down Berkshire’s cash hoard, valued at more than $44 billion at the end of 2007, to finance firms including Goldman Sachs Group Inc. and General Electric Co. as banks scaled back funding. Berkshire’s cash holdings were about $24.5 billion as of June 30.

“These large investments have attractive coupons and are boosting investment income, but have also increased the exposure” of Berkshire’s insurance companies to lower-rated credits, S&P said. Buying the remaining 77.4 percent of Burlington “will increase the concentration risk associated with having a substantial portion of invested assets in securities of one company.”

Buffett is borrowing half of the $16 billion in cash Berkshire plans to use for the Burlington deal, and that debt will be paid back in three annual installments, he told CNBC yesterday. Berkshire, which is also using its stock to fund the deal, will have more than $20 billion in consolidated cash after the purchase, he said.

‘Wounded’ Pride

Buffett said in May that the loss of top credit grades from Fitch and Moody’s had “no economic impact” on Berkshire.

“My pride may be wounded just a bit,” he said in a Bloomberg Television interview. “We sold bonds just a couple days after the Moody’s downgrade and we sold them at a spread that was much narrower than it would have been a month earlier.”

Berkshire is the biggest shareholder in Moody’s Corp., parent of Moody’s Investors Service.

GE and drugmaker Pfizer Inc. are among companies that lost their top credit grades from S&P in the past year. The businesses that still hold the AAA rating include Microsoft Corp., the world’s largest software maker, health-products firm Johnson & Johnson and Exxon Mobil Corp., the biggest oil company.

Berkshire advanced $1,080, or 1.1 percent, to $101,530, at 4:15 p.m. in New York Stock Exchange composite trading. The company has gained about 5.1 percent this year.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

Last Updated: November 4, 2009 17:57 EST