RTT NEWS: Fitch Downgrades Berkshire Hathaway one notch down to 'AA' with negative outlook

3/13/2009 1:06 AM ET

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(RTTNews) - Thursday, rating agency Fitch downgraded billionaire investor Warren Buffett's investment firm Berkshire Hathaway, Inc.'s (BRKa: News ) Issuer Default Rating or IDR to 'AA+' from a top-notch credit rating of AAA and senior unsecured debt ratings to 'AA' from 'AAA'. However, Fitch has affirmed its 'AAA' Insurer Financial Strength or IFS ratings on the company's insurance and reinsurance subsidiaries. The rating outlook for all entities is "Negative". Fitch cited concerns about the potential for losses on the insurer's equity and derivatives holdings.

Global corporate credit quality deteriorated at a heightened pace in 2008 with downgrades affecting 20% of Fitch-rated corporate finance issuers, up from 8.6% in 2007, according to a new Fitch study. Rating actions turned increasingly negative as 2008 progressed and as the economic environment worsened.

In this scenario, Fitch believes that 'AAA' ratings are not appropriate at the holding company level for financial-oriented enterprises like Berkshire. Though Fitch noted that Berkshire invests in a wide variety of retail, service and manufacturing companies, it does not see the investments diversified enough to offset exposure to the equity and credit markets in order to maintain 'AAA' rating level.

Berkshire uses a reasonable amount of financial leverage in its capital structure and at the end of fiscal 2008 its consolidated debt-to-total capital ratio was 25%. Berkshire's consolidated debt is derived from three sources, debt issued or guaranteed by the holding company, debt issued by the company's finance and financial products subsidiaries, and debt issued by the company's utilities and energy subsidiaries.

Fitch underlined that its current ratings on Berkshire assume that the company is likely to continue to aggressively deploy its cash and capital as difficult economic and capital market conditions persist and companies look for investors with strong balance sheets to provide funding.
The 'AAA' IFS ratings of Berkshire's insurance subsidiaries continue to reflect their strong capitalization and competitive positions, and underlying underwriting results. Fitch notes that at their current levels, Berkshire's IFS, IDR and senior unsecured ratings continue to be among the highest in Fitch's rating.

Berkshire Hathaway, which is among the largest insurers, whose profits in recent years came heavily from selling financial services, is being shaken by the current economic scenario. Berkshire has invested billions of dollars through derivative contracts tied to the performance of stock markets and financial instruments. Fitch noted that it couldn't regard a company so heavily engaged in financial services as among the safest borrowers.


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