Why More Big Buyouts Could Harm Buffett and Berkshire Hathaway Credit Ratings

Jon C. Ogg

Fitch’s report further said:

Precision Castparts represents a noteworthy acquisition for Berkshire Hathaway, but does not materially change the profile of the conglomerate. Precision Castparts’ trailing 12 month consolidated revenue as of September 27, 2015 was $9.7 billion, which would amount to roughly 5% of Berkshire Hathaway’s total revenue. Further, Precision Castparts’ near-term sales could be negatively impacted by challenges in the energy sector.

Berkshire Hathaway’s consolidated financial leverage ratio was 24.6% as of December 31, 2015. Pro-forma financial leverage including the $9 billion of new senior notes and $5 billion of Precision Castparts net debt that was assumed in the acquisition was 27.6% at year-end 2015. Consolidated interest coverage in 2015 was 8.0 times excluding realized investment gains, which is below Fitch’s expectations of 12 times for companies at Berkshire Hathaway’s rating level. An alternate calculation of interest coverage, excluding railroad, utilities and energy, was 18.3 times in 2015 and is consistent with the current rating category.

Keep in mind that laying out a strategy for future credit rating pressure is one thing. Downgrading a company’s credit rating is far worse, as is putting the credit on negative credit watch alerts. Neither of the worse cases were made here.

The additional risks noted at Fitch did actually specify what capital requirements and capital ratios need to be kept. Fitch said:

  • A consolidated run-rate debt-to-total capital ratio that exceeds 30% or a run-rate debt-to-total capital ratio from the holding company, insurance and finance operations (including debt issued or guaranteed by the holding company) that exceeds 25%.
  • Acquisitions or other actions that reduce outstanding cash below $10 billion or approximately 5x consolidated interest expense.

Berkshire Hathaway investors likely have very little to worry about here for now. Buffett said that he will always try to keep about $20 billion in capital on hand as dry powder. At $209,100 for the A shares, Berkshire Hathaway has a 52-week trading range of $186,900 to 223,011.

As far as how the $37 billion for Precision Castparts and the $26 billion for BNSF rank, Berkshire Hathaway’s market cap is $344 billion. In short, Buffett is growing the empire, but not with such mega-changes that investors should panic. That being said, the warning of potential downward pressure should not be ignored by Buffett — nor by his investors. Still, Berkshire Hathaway owns a large stake of almost 24.7 million shares of Fitch’s credit ratings rival Moody’s.