Berkshire Risks S&P Rating Cut on Leverage From Buffett Deal

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Warren Buffett’s Berkshire Hathaway Inc. may be downgraded by Standard & Poor’s after agreeing to buy manufacturer Precision Castparts Corp. for about $37.2 billion.

Buffett’s company was put on CreditWatch Negative because of “uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level,” the ratings firm said in a statement Tuesday on Omaha, Nebraska-based Berkshire. “To fund the acquisition, Berkshire is likely to use some of the capital resources available at its insurance companies.”

Buffett, 84, has built Berkshire over the past five decades into a sprawling conglomerate, largely by using premiums held at insurance units to fuel his stock picks and acquisitions. Its operations now include power companies, retailers, manufacturers and one of the largest U.S. railroads. The deal for Precision Castparts is among his biggest ever and a rare instance of using debt to finance a deal.

Berkshire has a AA rating from S&P, the third-highest of 10 investment-grade levels. The company was stripped of its AAA rating in 2010, a year in which Buffett cut the cash pile and took on additional debt to buy railroad BNSF. It was later lowered one step further in 2013 after S&P revised its criteria for evaluating insurance companies.

Cash Pile

Buffett has long said that he likes to keep a sizable financial cushion to deal with major claims at Berkshire’s insurance operations. The company had more than $66 billion in cash as of June 30, about $23 billion of which he plans to use for the Precision Castparts deal.

He said Monday after announcing the deal that he plans to borrow the remaining $10 billion. The target company, which makes turbine blades and fasteners for aircraft, also has more than $4 billion of debt.

S&P said it expects to update or resolve the CreditWatch listing within 90 days following discussions with Berkshire management. The ratings firm said it could affirm or lower the rating, after its review.

Buffett didn’t immediately return a message left with an assistant seeking comment on S&P’s stance.

The cost of insuring Berkshire’s debt through credit-default swaps rose to 59.14 basis points at 4:57 p.m. in New York from 59.07 last week. The price is still below its average since Dec. 31. The swaps climb when perceived credit risk increases.

Both Moody’s Investors Service and Fitch Ratings affirmed their ratings on Berkshire after the Precision Castparts deal was announced. Moody’s has an Aa2 rating on Buffett’s company, the third-highest possible, while Fitch gives Berkshire the fourth-best rank.

Cash Flow

In a note Tuesday, Moody’s said that the transaction would improve Berkshire’s earnings and cash flows, while diminishing financial flexibility in the near-term. Fitch said Monday that Buffett’s company will be approaching limits for leverage after the Precision Castparts deal is completed, and another similarly financed transaction could put pressure on the ratings.