Posted on 05 Feb 2010
Rating agency Standard & Poor's (S&P) today lowered its long-term counterparty credit rating on Berkshire Hathaway to AA+ from AAA, citing reduced capital adequacy following the acquisition of Burlington Northern Santa Fe and concerns over the succession plan for its CEO Warren Buffett.
S&P also lowered the financial strength ratings on Berkshire’s core insurance operations to AA+ from AAA.
The ratings have been removed from credit watch. The outlook is stable.
"We are taking these rating actions in anticipation of Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe Corporation, which we expect to close no later than February 15," said John Iten, credit analyst at S&P.
The acquisition of the 78% of Burlington that Berkshire did not already own for $26bn will be financed with a combination of 60% cash and 40% through the issuance of new shares. The cash portion of about $16bn will come from cash on hand and new debt issuance of about $8bn. S&P expects that much of the internal cash will come from Berkshire's core insurance operations, as has been the case in other transactions.
"The 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 an AAA rating and is not expected to return to extremely strong levels in the near term," said Iten. "Furthermore, we expect that the consolidated liquidity position of Berkshire will be reduced from extremely strong historical levels as a result of the acquisition."
S&P said investment risk was also high for Berkshire. The rating agency said a big concern is that Berkshire's risk tolerances appear to have increased, yet S&P believes they remain ill defined while the organization increases in complexity.
S&P noted, however, that earnings remain very strong, and are expected to increase following the Burlington acquisition. S&P expects that Berkshire likely will use these incremental earnings and cash flows to pay down the debt resulting from the acquisition rather than rebuild insurance company capitalization.
Uncertainty surrounding management succession and management structure, corporate culture, and business strategy following an eventual transition of the company's leadership from Buffett is a continuing concern, said S&P. This is only partially mitigated by a board-approved succession plan and the experienced management teams in place at the operating companies, given Buffett's strong and positive influence on all aspects of operations at Berkshire.