Berkshire Cut to AA by S&P as Ratings Firm Revises Criteria

Warren Buffett’s Berkshire Hathaway Inc. had its credit grade lowered one level by Standard & Poor’s after the ratings firm revised its criteria for evaluating insurance holding companies.

Berkshire was cut to AA from AA+, S&P said today in a statement about the Omaha, Nebraska-based company. The ratings firm said its outlook on all of Berkshire’s ratings is negative.

“The lower credit rating on BRK better reflects our view of BRK’s dependence on its core insurance operations for most of its dividend income,” John Iten, an S&P analyst, said in the statement, referring to Buffett’s company by its stock ticker.

Berkshire held the highest credit rating from S&P, Fitch Ratings and Moody’s Investors Service as recently as 2009. A plunging equity market following the 2008 financial crisis hurt the value of its stock portfolio and boosted liabilities on derivatives, leading to cuts by Moody’s and Fitch. The company was stripped of its last AAA rating in February 2010 by S&P after agreeing to buy railroad Burlington Northern Santa Fe for $26.5 billion.

Today’s cut brings S&P’s rating in line with Moody’s, which rates Berkshire Aa2. Fitch rates Buffett’s company one level lower. Berkshire is the largest shareholder in Moody’s parent Moody’s Corp. Buffett didn’t respond to a request for comment sent to an assistant.

Bond Markets

The downgrades haven’t hurt Berkshire’s standing in the bond markets. The company’s finance unit sold 5- and 30-year debt at its lowest coupons ever last week, according to data compiled by Bloomberg. Its $500 million of 4.3 percent bonds due May 2043 rose 0.7 cents at 9:53 a.m. in New York to trade at 99.25 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The extra yield investors demand to hold the 30-year bond rather than government debt was 125 basis points, or 1.25 percentage points, Trace data show. That compares with a 144 basis-point spread on a Bank of America Merrill Lynch index for AA rated U.S. corporate debt maturing in 15 years or longer.

Berkshire’s Class A shares fell 1 percent to $167,303 at 4 p.m. in New York, trimming their gain this year to 25 percent. That follows a 17 percent advance in 2012.

As Berkshire’s chairman and chief executive officer for more than four decades, Buffett, 82, built the firm from a textile maker into a company that sells insurance, hauls freight, generates electricity, manufactures chemicals and sells products from diamonds to underwear. The billionaire has used funds from insurance units including Geico to buy stocks and make acquisitions.

Insurance Operations

Berkshire’s non-insurance operating units, other than BNSF, typically don’t provide a significant portion of dividends to the holding company, Iten said. That makes the company dependent on insurance operations to meet obligations.

The new ratings criteria increased scrutiny of holding companies that own insurers, said Kevin Ahern, a managing director at S&P. At Berkshire, S&P was concerned that payments from insurance units to the holding company could be limited if the insurers face claims or suffer investment losses, he said. BNSF is owned by one of Berkshire’s insurers, making its payouts subject to regulatory oversight.

“There’s an element of risk, but I wouldn’t say that there’s a concern today that there’s going to be a regulatory chokehold,” Ahern said. If BNSF wasn’t held by an insurance unit, “we probably wouldn’t have this discussion.”

‘It’s Silly’

The concern that Berkshire could run short of funds to pay its obligations is overdone, said Jeff Matthews, a shareholder who has written books about Buffett. Berkshire had about $49 billion in cash at the end of March.

“It’s silly,” Matthews said in a phone interview. “If Buffett wanted a dividend from any one of his companies, he could pick up the phone and get it right now.”

S&P also cited the riskiness of Berkshire’s stock investments and questions over who will replace Buffett as reasons for the downgrade.

The billionaire has said his roles will be divided when he’s no longer leading Berkshire. The board has selected a candidate to succeed him as CEO, without identifying the person, he said in 2012. Investments will be overseen by Todd Combs and Ted Weschler, former hedge-fund managers who were hired in the past three years. Buffett has said his son, Howard, a Berkshire director since 1993, could be non-executive chairman.

Capital Concern

The negative outlook reflects the potential that a large acquisition or investment losses could drain capital, S&P said. It’s also tied to S&P’s negative outlook on the U.S. government’s rating, according to the statement.

Buffett and Jorge Paulo Lemann’s 3G Capital agreed in February to a deal to take ketchup maker HJ Heinz Co. private. Berkshire will get half the common equity for about $4 billion and preferred shares for another $8 billion. Debt issued for the deal won a record low coupon for similar-maturity and rated securities in March.

S&P published its revised ratings criteria for insurers last week. At the time, S&P said a majority of ratings would not change and that positive ratings actions would exceed negative ones.

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