Wednesday, March 25, 2009 0 comments

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.

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