Buffett Spared S&P Downgrade Over Precision Castparts Deal

  • Ratings company affirms AA rating on Berkshire Hathaway
  • S&P now reviews Berkshire as conglomerate, not insurance firm

Berkshire Hathaway Inc. was spared a downgrade by Standard & Poor’s after the ratings firm completed an analysis of one of Warren Buffett’s biggest acquisitions.

The takeover of Precision Castparts Corp. had a neutral effect on Berkshire’s AA credit rating, S&P said in a statement on Friday, in which it affirmed the grade. S&P is now viewing Buffett’s firm as a conglomerate, rather than an insurance holding company.

Berkshire has “a strong business risk profile, modest financial risk profile, and highly diversified profile as a conglomerate operating in multiple business segments with relatively low correlation,” S&P said in the statement. “Our ratings on Berkshire are further supported by its excellent profitability, exceptional consolidated liquidity profile, and supportive financial policy.”

Berkshire completed the Precision Castparts deal Jan. 29, paying about $32 billion in cash. A day after the agreement was announced in August, S&P said it was reviewing whether to lower Berkshire’s AA rating because of “uncertainty” about how Buffett would fund the takeover. Both Moody’s Investors Service and Fitch Ratings affirmed their credit grades at the time.

Buffett, 85, built Berkshire through five decades of stock picks and acquisitions. Its operations include insurers, power companies, retailers, manufacturers and one of the largest U.S. railroads. Precision Castparts makes metal industrial components for jet engines and power plants as well as pipes for the oil and gas industry.

Increased Diversification

Buffett has said that insurance is Berkshire’s “core” operation. But his expansion into other industries has diminished the importance of units like auto carrier Geico and National Indemnity. Had Precision Castparts been part of Berkshire in 2014, non-insurance units would have been responsible for more than three-quarters of consolidated earnings before interest, taxes, depreciation and amortization, S&P said.

In a separate statement, the ratings firm affirmed its AA+ financial strength and long-term counterparty credit ratings on insurance subsidiaries, including Geico, National Indemnity and General Reinsurance Corp. The units had been placed on CreditWatch Negative in August.

Railroad, Energy

S&P also raised credit grades on Berkshire’s utility business and railroad, Burlington Northern Santa Fe LLC, two levels to A on Friday. The businesses are among the largest at Buffett’s company and tap the bond markets frequently to help fund their investments in infrastructure. Buffett has long pointed out that their long-term debt is not guaranteed by Berkshire.

Because Buffett’s company could face large claims at its insurance operations, he has insisted on keeping a sizable financial cushion at his company. It had more than $66 billion in cash as of Sept. 30.

S&P stripped Berkshire of its AAA rating in 2010, a year in which Buffett cut the cash pile and took on additional debt to buy BNSF. The credit grade was lowered one step further in 2013 after S&P revised its criteria for evaluating insurers.

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