Ranks of AAA Companies Thinning After GE, Berkshire Downgrades

By Erik Holm

March 13 (Bloomberg) -- The credit crisis is thinning the ranks of AAA companies, after General Electric Co. and Warren Buffett’s Berkshire Hathaway Inc. lost top-level debt ratings on concern about losses on financial instruments.

Fitch Ratings yesterday stripped Berkshire of its AAA grade, citing risks stemming from derivatives holdings and Buffett’s role as chief investment officer. Hours earlier, GE lost the top rating at Standard & Poor’s that it’s held since 1956. S&P and Moody’s still rate Berkshire triple-A.

The downgrades underscore how the credit seizure is hurting perceptions of even the strongest companies, said Michael Yoshikami, chief investment strategist at YCMNet Advisors. Five non-financial U.S. companies, including Microsoft Corp., now hold S&P’s AAA grade, down from more than 60 in 1982, according to the ratings firm.

“Triple-A in the end is probably going to be left for the Treasury when it’s all said and done,” said Yoshikami, whose Walnut Creek, California-based firm oversees $800 million and owns Berkshire Hathaway shares. “You’re seeing the rating agencies taking an abundance of caution at this point.”

U.S. companies aren’t alone in losing triple-A status, as the weakest world economy in six decades strip them of sales.

Toyota Motor Corp., the Japanese company that ended General Motors Corp.’s 77-year reign as the world’s largest carmaker in 2008, had its credit rating cut to Aa1 from Aaa at Moody’s on Feb. 6. Toyota is forecasting its first loss in 59 years as auto sales slump.

Sign of the Times

Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the Omaha, Nebraska-based company’s 2008 annual report.

Buffett’s stock-picking acumen has gained him a following among investors worldwide and the moniker “Oracle of Omaha.” Forbes magazine ranks him the world’s second-richest person after Microsoft Chairman Bill Gates, with $37 billion.

“Major fans of Mr. Buffett, of which there are many, may view this downgrade as a sign of just how pervasive this downturn is and that nobody is immune,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group in Hong Kong.

Berkshire stock fell 35 percent in 12 months on concern that Buffett’s bets on derivatives -- instruments he has called “financial weapons of mass destruction” -- will crush profit at the firm. The performance still beat the 43 percent drop in the S&P 500. Berkshire shares were unchanged in extended trading from yesterday’s close of $85,700.

Buffett’s assistant, Carrie Kizer, didn’t respond to a message left after normal business hours in Omaha.

Buffett’s CIO Role

Buffett’s role as chief investment officer puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said.

“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said. Buffett is 78.

Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP, said investors may give more weight to analysis by S&P or Moody’s. “Buffett’s true believers won’t believe it,” he said.

Moody’s and S&P have “stable” outlooks on Berkshire.

Transparency

The loss of GE’s AAA is a setback for Chief Executive Officer Jeffrey Immelt, who was born the year the company got the rating and said as recently as January that GE deserved the top credit grade.

The company has come under attack from some investors and analysts for a lack of transparency at GE Capital, the finance arm. Investors are concerned that the unit, already facing rising credit card-delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates.

GE shares traded below $6 on March 4, the lowest since December 1991, while credit-default swaps that investors buy as protection against a default by GE Capital surged. The stock jumped 13 percent to $9.57 yesterday in New York after S&P put a “stable” outlook on the rating, comforting investors concerned about a possible sharper cut.

“It takes away that ambiguity,” said Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati.

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