The Death of AAA Ratings... S&P and Berkshire Hathaway (BRK-A) (BRK-B) (BNI)

Berkshire Hathaway Inc. (NYSE: BRK-A) NYSE: BRK-B) is in the process of selling $8 billion in notes today to help fund the acquisition of Burlington Northern Santa Fe (NYSE: BNI).  And Standard & Poor’s just gave Warren Buffett a pre-sale slap in the face.  S&P has lowered the rating of Berkshire Hathaway over how the terms of the merger change the financial standing of the giant conglomerate.

S&P cut the ratings on Berkshire Hathaway and various affiliates.  This was telegraphed because S&P put Berkshire Hathaway on CreditWatch with negative implications on November 4, 2009. The outlook is now stable.  The long-term counterparty credit rating was cut to ‘AA+’ from ‘AAA,’ and the financial strength ratings on Berkshire’s core insurance operations were cut to ‘AA+’ from ‘AAA’ with a stable outlook.

This is the standout quote from S&P: “We believe that the railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity, and that investment risk with sizable concentrations remains very high.  Also noted is, “The group’s risk tolerances are… not clearly defined at the enterprise level and are a concern as the group’s profile becomes more complex.”

One issue is that S&P expects a significant portion of internal cash used in the deal will come from core insurance operations.  S&P says that has been the case in deals past…. Noted was “…no longer consistent with a ‘AAA’ rating and is not expected to return to extremely strong levels in the near term.”

As a final slap in the face against Warren Buffett, S&P noted that ‘uncertainty remains regarding management succession.’  Again, this has been telegraphed.  It was last April when Moody’s gave Berkshire and Buffett a downgrade.

JON C. OGG