Thursday, February 4, 2010

Berkshire Hathaway Downgraded By S&P From AAA to AA+,

The cost of money just gone up for Berkshire Hatahway. S&P has just bitch slapped Warren Buffett, with a downgrade of Berkshire Hathaway from AAA to AA+

Check out what S&P has to say about Berkshire:
The rating actions are based on our view that Berkshire's overall capital adequacy, as well as that of its insurance operations, has weakened to levels no longer consistent with a 'AAA' rating and is not expected to return to extremely strong levels in the near term. Furthermore, we expect that the consolidated liquidity position of BRK will be reduced from extremely strong historical levels as a result of the acquisition. As capital adequacy and liquidity levels have declined, investment risk remains very high in our view, compounding the need for extremely strong capital and liquidity given potential investment volatility. A key concern is that BRK's risk tolerances appear to have increased, yet we believe they remain ill defined while the organization increases in complexity. Generally, we believe Berkshire has a high risk tolerance for capital volatility and investment risk. We do not believe that the company's overall risk management framework has evolved at the same pace as the organization's complexity and that enterprise risk management practices remain in silos within each investment...

The outlook on the ratings is stable. We expect BRK's consolidated operating earnings to improve in 2010, in line with an overall gradual economic recovery in the U.S. BNSF also likely will contribute to earnings for Berkshire in 2010 and prospectively. Despite this increase in earnings, sizable declines in capital adequacy and liquidity are expected to result in a multiyear rebuilding period for the company to restore to historical levels. Furthermore, earnings remain potentially volatile because of the insurance operations' exposure to any sizable natural peril or man-made catastrophe. Our expectation is that any such event would result in lower earnings in a given year but not an overall loss that would reduce capital in 2010. We expect financial leverage and coverage metrics to improve from their current levels over the next three years as BRK repays the debt related to the BNSF acquisition. The ratings could come under more pressure if BRK further increases its investment risk tolerance or if its overall level of capital adequacy relative to its risks deteriorates further. We currently do not expect that we would raise the ratings in the intermediate term.
If you read between the lines, one might say that S&P is believes that Berkshire Hathaway is too big for Buffett to manage properly and that the quality of the management risk teams underneath him are unclear. Further, they are looking at Buffett's older investing strategy, and looking at his new taste for higher risk and less liquidity, and saying, WTF?

Fitch and Moody’s downgraded Berkshire in 2009.

1 comment:

  1. Buffett knows the end is "closer than you think", to quote the main character in "The Road", as he tears 44 from the rest of the map. Duvall's character is right- there were warnings, but even if you knew what to do, you still didn't know what to do. Maybe it means something, maybe not. Buffett is no fool, but he isn't divine either.