S&P Puts Eagle Eye On Buffett & Berkshire (BRK-A, GE)

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Standard & Poor’s Ratings Services is putting Mr. Buffett on Watch.  Berkshire Hathaway Inc. (NYSE: BRK-A) has had its ratings outlook revised to “Negative” from “Stable” along with Berkshire Hathaway Finance Corp., Berkshire Hathaway Assurance Corp., and other subsidiaries.  The good news is that the “AAA/A-1+” ratings and the counterparty credit ratings were maintained.  At least for now.

This will sound a lot like when S&P fired a shot across the bow of General Electric Co. (NYSE: GE) when it put it on negative watch.  It took S&P only about three months to downgrade GE. Keep in mind that Fitch already cut its ratings on Berkshire.

This notes that S&P said Berkshire could get a negative review back in December if current circumstances did not change.  What is interesting is that in this cut S&P is citing the decline in equity values as having reduced Berkshire’s insurance statutory capital.  A preliminary analysis indicates that the group’s capital is “no longer redundant at the ‘AAA’ level.”

S&P’s time horizon is 12-months for the review and it states that an increase in holdings values or a likely rebuilding of capital could allow this to go back to “Stable.”  The flip-side is that it notes continued equity drops and an inability to restore capital back to that of a ‘AAA’ via earnings growth or capital contributions then S&P “might lower the ratings.”  The only real good news there is that the note says the belief is that it does not currently anticipate any downgrades of more than one notch in ratings.

Buffett is out supposedly looking for a deal to do in the $5 to $20 billion range.  It is possible he would raise capital, but even Mr. Buffett has no inclination to believe he can just wish-up the market.

Jon C. Ogg
March 24, 2009