Buffett's Berkshire May Lose AAA Rating From S&P (Update1)

By Erik Holm
Bloomberg News
March 24, 2009


March 24 (Bloomberg) -- Billionaire Warren Buffett's Berkshire Hathaway Inc. may lose its AAA credit rating from Standard & Poor's because values have fallen in its equity portfolio and capital has shrunk at the insurance operations.

The rating could be cut in the next 12 months, S&P said in a statement today about the Omaha, Nebraska-based insurance and investing firm. An S&P downgrade would be the second for Berkshire after Fitch Ratings stripped its AAA rating on March 12. S&P said any downgrade probably would be a one-notch cut.

"Pretty much any company in the world has to have a negative outlook at this point," said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington who has studied Berkshire. "It's a reflection of the economy more than it is something that's happening at Berkshire Hathaway."

Berkshire stock fell 32 percent in 12 months on concern that the equity portfolio and speculation that Buffett's bets on derivatives -- instruments he has called "financial weapons of mass destruction" -- will crush profit. S&P noted that the derivatives still have at least 10 years to run before Berkshire would face payments.

S&P may cut its rating if "continued substantial deterioration in the equity markets hurts capital further, or if it appears that the insurance group will not be able to restore capital back to the 'AAA' level," according to the statement.

Berkshire's Record

Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the company's 2008 annual report. The firm had $25.5 billion in cash at yearend, according to a regulatory filing, and Buffett has said he may be hunting for acquisitions in the U.S.

"There's a lot of liquidity on the Berkshire balance sheet, and a lot of opportunities for Mr. Buffett," said Martin.

Fitch cited the potential for losses on the insurer's equity and derivatives holdings for dropping Berkshire's issuer default rating to AA+. Buffett's role as chief investment officer also puts the company at risk if the 78-year-old executive becomes unable to do the job, Fitch said in a statement.

Downgrades at insurer American International Group Inc. triggered a wave of collateral calls by firms that held derivatives from the New York-based firm. The deals included provisions that required AIG to put up cash after a ratings cut, and the resulting demands for funds pushed the firm to the brink of bankruptcy.

Collateral

Buffett said in an e-mail in November that collateral calls as a result of ratings downgrades are "under any circumstances, very minor." He told shareholders in his annual letter last month that "most" Berkshire's derivative contracts "contain no collateral posting requirements."

Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.

"If Berkshire isn't triple A, I'm not sure which company would be," Buffett said in a Bloomberg interview at last year's annual shareholders' meeting.

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