Lessons of Triple-A Past: Berkshire Hathaway by Fitch (BRK-A)

It was once upon a time that the ratings agencies used to have Warren Buffett’s own company of Berkshire Hathaway Inc. (NYSE: BRK-A) as a “AAA” rating.  It was one of the few, but the ills of the last decade erased most Triple-A’s.  NOw we know that the unthinkable rating cut of a sovereign dent rating like the United States is no longer a sacred cow at all of the ratings agencies.

Last week came a new $2 billion bond issue of senior notes from Berkshire Hathaway.  While today’s note is from Fitch, there is a simple reminder: one downgrade does not assure downgrade after downgrade automatically.  As a reminder, Berkshire Hathaway Inc. was covered in our top analyst calls of the week as it received two equity analyst upgrades.

Fitch Ratings assigned a ‘A+’ rating to Berkshire Hathaway’s new issue of senior notes.  Fitch also affirmed the ‘AA-‘ Issuer Default Rating and the ‘AA+’ Insurer Financial Strength ratings on the company’s key insurance subsidiaries.   More importantly, the Rating Outlook is listed as being Stable.  At the same time, Fitch has assigned an ‘A+’ rating to three senior notes totaling $1.5 billion issued by Berkshire Hathaway Finance Co. (BHFC) in January 2011.

The $2 billion note issue “only modestly increases consolidated financial leverage” to 26% of total capital while its consolidated operating earnings interest coverage for the first half of 2011 was 5.8 times on a pro forma June 30, 2011 basis according to Fitch.

SOme of the positive points are from solid underwriting profits, earnings from a growing number of non-insurance acquisitions, and that the investment strategy has brought book value growth and a point of differentiation from peers.

Berkshire Hathaway is no AAA any long, but neither is the UNited States even if Warren Buffett called our nation a “quadruple-A” a week earlier.  The good news is that losing a Triple-A rating at one or more of the ratings agencies does not assure that more downgrades are going to continue.

Lessons to be learned….

JON C. OGG