It was once upon a time that the ratings agencies used to have Warren Buffett’s own company of Berkshire Hathaway Inc. (NYSE: BRK-A) as a “AAA” rating. It was one of the few, but the ills of the last decade erased most Triple-A’s. NOw we know that the unthinkable rating cut of a sovereign dent rating like the United States is no longer a sacred cow at all of the ratings agencies.
Last week came a new $2 billion bond issue of senior notes from Berkshire Hathaway. While today’s note is from Fitch, there is a simple reminder: one downgrade does not assure downgrade after downgrade automatically. As a reminder, Berkshire Hathaway Inc. was covered in our top analyst calls of the week as it received two equity analyst upgrades.
Fitch Ratings assigned a ‘A+’ rating to Berkshire Hathaway’s new issue of senior notes. Fitch also affirmed the ‘AA-’ Issuer Default Rating and the ‘AA+’ Insurer Financial Strength ratings on the company’s key insurance subsidiaries. More importantly, the Rating Outlook is listed as being Stable. At the same time, Fitch has assigned an ‘A+’ rating to three senior notes totaling $1.5 billion issued by Berkshire Hathaway Finance Co. (BHFC) in January 2011.
The $2 billion note issue “only modestly increases consolidated financial leverage” to 26% of total capital while its consolidated operating earnings interest coverage for the first half of 2011 was 5.8 times on a pro forma June 30, 2011 basis according to Fitch.
SOme of the positive points are from solid underwriting profits, earnings from a growing number of non-insurance acquisitions, and that the investment strategy has brought book value growth and a point of differentiation from peers.
Berkshire Hathaway is no AAA any long, but neither is the UNited States even if Warren Buffett called our nation a “quadruple-A” a week earlier. The good news is that losing a Triple-A rating at one or more of the ratings agencies does not assure that more downgrades are going to continue.
Lessons to be learned….
JON C. OGG