Buffett Loses Last AAA Rating as S&P Cuts Berkshire

Bilibala: now day, holding an AAA credit rating means nothing. With such low interest rate, if cash flow is not an issue, why not borrow and invest? This hold true to corporation and so to individual.

http://www.businessweek.com/news/2010-02-04/buffett-loses-last-aaa-rating-as-s-p-cuts-berkshire-update1-.html
(Adds shares in sixth paragraph, S&P comment in 11th.)
By Andrew Frye

Feb. 4 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. was stripped of its last AAA credit rating by Standard & Poor’s after the billionaire investor agreed to buy railroad Burlington Northern Santa Fe Corp.

Berkshire, which is taking on debt to fund the $26 billion takeover, was cut one level to AA+ from S&P’s highest grade, the ratings firm said today in a statement. The downgrade comes the same day Berkshire filed to sell $8 billion of notes to fund the Burlington Northern purchase, and concludes a review that S&P announced on Nov. 4, the day after Berkshire disclosed the deal.
“The railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity,” S&P said. “Risk tolerances appear to have increased.”

Buffett, 79, has called the railroad takeover an “all-in wager” on the U.S. economy. Berkshire lost its top credit grades at Fitch Ratings in March and at Moody’s Investors Service in April amid a slump in the firm’s manufacturing, retail and travel units. The earlier downgrades were on concern about Buffett’s successor and the firm’s derivative bets.

The ratings firms “are hedging their bets in the event of another economic downturn,” said Michael Yoshikami, chief investment strategist at Berkshire shareholder YCMNet Advisors. Buffett’s firm is “expanding in economically sensitive businesses, like the railroads,” he said.
Berkshire’s Class A shares fell $3,250, or 2.9 percent, to $108,450 at 2:07 p.m. in New York Stock Exchange composite trading. Buffett didn’t respond to a request for comment left with an assistant.

Wounded Pride
General Electric Co. and drugmaker Pfizer Inc. are among companies that lost their top credit grades from S&P in the past year. Berkshire, which Buffett built into a $170 billion company over four decades, was raised to AAA at S&P in 1989.

Berkshire reported its first loss since 2001 in the first quarter of 2009 as Buffett’s stock bets soured. The firm returned to profit in the second and third quarters as equity indexes advanced. Still, losses at Berkshire’s NetJets subsidiary and earnings declines at Clayton Homes contributed to a pretax profit plunge of more than half at Berkshire’s manufacturing, service and retailing units in the first nine months of 2009.

Spending the Stockpile
Buffett, the second-richest American, positioned Berkshire to weather a contraction in the U.S. economy by stockpiling $44 billion in cash. Starting in 2008, when corporate borrowing costs surged, he drew on that hoard to finance Goldman Sachs Group Inc., GE, Swiss Reinsurance Co. and the Mars Inc. takeover of chewing-gum maker Wm. Wrigley Jr. Co. Berkshire had about $26.9 billion of cash as of Sept. 30.

“Albeit weakened, we view the company’s liquidity position and balance sheet as still very strong.,” S&P said.

Berkshire is using $8 billion of the cash stockpile on the purchase of Forth Worth, Texas-based Burlington Northern, and said in the debt prospectus today it plans to sell $8 billion of senior unsecured notes. The notes may be sold as soon as today, according to a person familiar with the offering. The railroad deal is expected to be completed this quarter.

Buffett, Berkshire’s chairman and chief executive officer, said in May that the loss of top credit grades from Fitch and Moody’s had “no economic impact” on Berkshire. “My pride may be wounded just a bit,” he said in a Bloomberg Television interview.

Bond Yields
Corporate debt with an AA rating yields an average of 3.72 percent, or 12 basis points more than AAA bonds, according to Bank of America Merrill Lynch data as of yesterday. That means companies ranked AA pay an average of $1.2 million a year in extra interest costs on $1 billion of debt. The spread between AAA debt and AA bonds has tightened about 59 basis points since the beginning of 2009.

Berkshire’s AA+ ranking is between S&P’s AAA and AA ratings. The company’s 4 percent notes due in 2012 fell 0.13 cents on the dollar to 105.5 cents to yield 1.42 percent, or a spread of 60 basis points more than similar-maturity Treasuries, as of 10:34 a.m. New York time, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. A basis point is 0.01 percentage point.

S&P joins Fitch in citing concern about Buffett’s eventual departure from the company. Buffett has said he’ll be replaced by three or more people: a CEO from a list he and the board of directors keep, at least one person to manage investments and his son Howard Buffett, who has been picked to be the next chairman to carry on Berkshire’s corporate culture.

‘Ongoing Concern’
“Uncertainty surrounding management succession and management structure, corporate culture, and business strategy following an eventual transition of the company’s leadership from current CEO Warren Buffett is an ongoing concern,” S&P said. “This, in our view, is only partially mitigated by a board-approved succession plan.”

Mohnish Pabrai, the founder of Irvine, California-based Pabrai Investment Funds and a Berkshire shareholder, said the ratings company cut the grade because it “doesn’t like the uncertainty.”

“There is a very clear-cut succession plan, but he hasn’t shared it with Mr. S and Mr. P,” Pabrai said. Berkshire has “a very deep bench” of potential replacements.

The ratings company lowered Berkshire’s long-term counterparty credit rating and the financial strength ratings on the company’s main insurance operations to AA+ from AAA.

Berkshire and its subsidiaries cut about 3,000 jobs since December and now employ about 222,000 people, the company said in the debt prospectus today. That’s 1.3 percent less than the figure the company reported six weeks ago, and almost 10 percent below the 246,083 disclosed in the company’s 2008 annual report.

--With assistance from John Detrixhe in New York. Editors: Erik Holm, Dan Kraut
To contact the reporter on this story: Andrew Frye in New York at +1-212-617-1869 or afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net