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NU Online News Service, Feb. 4, 4:03 p.m. EST
Standard & Poor's Ratings Services said it has cut the Berkshire Hathaway Inc. long-term counterparty credit rating and the financial strength ratings of its insurance operations because of its railroad purchase.
Both ratings were reduced to “AA-plus (very strong)” from “AAA (extremely strong).”
At the same time, S&P took the firm off CreditWatch with negative implications and said its outlook is “stable.”
Berkshire Hathaway has said it will purchase Burlington Northern Santa Fe for approximately $26 billion in cash and stock for the shares it does not already own. The transaction is pending shareholder approval.
The rating firm also mentioned that Berkshire’s 79-year-old CEO Warren Buffett is “an ongoing concern. This, in our view, is only partially mitigated by a board-approved succession plan and the experienced management teams in place at the operating companies, given Mr. Buffett's strong and positive influence on all aspects of operations at Berkshire.”
S&P said it believes the weight of the railroad transaction “will reduce what historically has been extremely strong capital adequacy and liquidity, and that investment risk with sizable concentrations remains very high.”
The firm added it believes that Berkshire’s risk tolerances are “not clearly defined at the enterprise level and are a concern as the group's profile becomes more complex.”
S&P analyst John Iten noted that the transaction is Berkshire’s largest acquisition to date.
It already owned more than 22 percent of the stock of the railroad and will finance the acquisition of the remaining shares for about $26 billion with a combination of 60 percent cash and 40 percent through the issuance of new shares.
The cash portion of about $16 billion will come from cash on hand and new debt issuance of approximately $8 billion. S&P said it expects a significant part of the internal cash will come from Berkshire’s core insurance operations, as has been the case in other transactions.
Mr. Iten said, “We expect that the consolidated liquidity position of BRK will be reduced from extremely strong historical levels as a result of the acquisition.”
A key concern, according to S&P, is that Berkshire’s “risk tolerances appear to have increased, yet we believe they remain ill-defined while the organization increases in complexity.”
Earnings at the firm remain very strong, it was noted, and are expected to increase following the acquisition of BNSF.
“It is our expectation that Berkshire likely will use these incremental earnings and cash flows to pay down the debt resulting from the acquisition rather than rebuild insurance company capitalization,” said S&P.
Berkshire's insurance group includes Geico, General Re, NRG and Berkshire Hathaway Assurance.