S&P warns Berkshire about AAA rating

MarketWatch is reporting that S&P has warned Berkshire Hathaway about its AAA rating, and calls for Berkshire to raise its capital cushion within 2 years:

Standard & Poor's Ratings Services said Wednesday that it may cut Berkshire Hathaway's AAA rating if the insurance-focused conglomerate run by Warren Buffett can't boost its capital in a year or two.

S&P affirmed its AAA rating on Berkshire but revised its outlook to negative from stable.

If, over the next 12 months, Berkshire's big equity investments stabilize or improve, or if the company can rebuild capital in one to two years through earnings or other means, the outlook could be revised back to stable, S&P said. Reducing the volatility of Berkshire's capital position might help too, the agency added.

However, S&P warned that if further big equity market declines dent capital more, or if insurance earnings and other sources of capital aren't enough to restore capital, then Berkshire's AAA rating may be cut. Any downgrade probably would be no more than one notch, the agency noted.

S&P's warning comes on the heals of a downgrade from Fitch Ratings, which cut Berkshire's issuer default rating to AA+ from AAA and its senior unsecured debt rating to AA from AAA on March 12.


I don't follow Berkshire that closely but I imagine rating cuts will lower earnings, by raising cost of capital, and weaken Berkshire's competitive position in certain industries (such as bond insurance and reinsurance.) It will also slightly hurt Warren Buffett's reputation and prevent him from entering certain derivatives positions.

Comments

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say...
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt...
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>