Berkshire Could Lose Last AAA Rating!

[Parsad]

While I'm sure it really doesn't matter as long as claims get paid and Berkshire keeps printing money, the two pillars of Warren's foundation for Berkshire have been dislodged:

 

1) Maintain our AAA-rating

2) Never split our shares

 

Cheers!

 

http://www.cnbc.com/id/33621425

[twacowfca]

Sanj, you're right, of course.  But consider this: having high priced

shares has the effect of keeping BRK out of the S&P 500

and other indexes and keeping the share price at a very

modest premium to BV.  I personally wouldn't mind if

BRK's premium to BV tracked it's IV.  It would still be a relative

bargain compared to most other large caps IMHO.

[Mungerville]

Well, I am happy about the share split.  Means more volatility, which means more money for me.  I'll take that.

[shalab]

Two things:

 

Berkshire gets 5.4 +billion in interest and dividends per year. Also the subs kick off cash. BNI itself kicksoff 1 billion cash per year. The debt is around 8 billion paid out in three years. Thus the analyst's thinking seems to be a bit off.

 

The splitting may be helpful for shareholders if BRK gets to SP500. There has been more selling than buying recently from foundations such as the Gates foundation. I also think there may be more selling pressure from estate planning people as long term shareholders redo their plans. If Berkshire gets into SP500, then potentially the number of buyers will increase.

 

 

[bookie71]

A question for you experts out there, "Aren't you automatically put on credit watch any time you do an unusually large deal?"

[Parsad]

Yes often, but not always.  For example, Fairfax just issued $1B in equity and another $400M in preferreds, but there was no negative credit watch for the Odyssey Re acquisition. 

 

I think Berkshire's had a bit tougher time through the last year, and they do have alot of underwriting risk and derivatives risk that the credit rating agencies may be concerned about.  If Berkshire had enough cash where they didn't have to issue any debt and retained at least $25B in cash, I don't think S&P would have been concerned...or if they had issued stock, then there probably would not have been any implications as well.  After Berkshire pays off the debt in three years, they'll get their AAA-rating back, if not sooner.  Cheers!

[bookie71]

Additional equity is not additional liabilities - additional equity helps assure that liabilities get paid.

[shalab]

I think it is the derivative risk that got the downgrade although fitch tried to downgrade because of Buffett's age.

 

I do think Buffett has thought through the split issue carefully and I havent seen him do things without reason.

[bookie71]

I thought he did the split so he could offer the BNI share holders a tax free swap if they wanted one.

[SharperDingaan]

 

Keep in mind that credit ratings are not what most people think they are. They are marketing tools.

 

If the US Fed lost its AAA rating, would BRK really be able to keep its AAA rating? ; or is it more likely that the rating scale would simply be inflated to make the Fed rating the 'new AAA' ?

 

If BRK did not do something to 'weaken' their rating they would be punished for it.

 

SD

[woodstove]

In the land of the overextended, the man with affordable debt is king?

[SharperDingaan]

 

.... the man with affordable debt is king?

 

Ah, .... but only relative to the man with the printing press!

 

SD

[Dynamic]

I think there's a lot of "conventional thinking" used by ratings agencies (and conservative accounting within Berkshire's filings), which doesn't necessarily provide the most accurate picture when applied to Berkshire's penchant for long-tail insurance and indeed long-term derivatives that put a lot of cash in Berkshire's hands for a long period in exchange for a chance of substantial loss events spread over various far-off maturity dates (and to be paid in future dollars, not current dollars).

 

For example, those $37.1bn equity index puts in various parts of the world (Annual Report 2008, page 18) maturing no earlier than 9th Sep 2019 have raised $4.9bn in premiums versus a $10bn balance sheet liability based on the Black-Scholes formula (which is conventional, but misleading for such long term options) resulting in a $5.1bn mark-to-market loss at year end 2008, which is partly offset by higher indexes now, though greater historic volatility might counteract some of that thanks to Black-Scholes.

 

Such amounts of notional loss are not negligible and I'd assume they could easily contribute to a rating decline in conjunction with, say, major declines in equity market prices. And frankly, apparently wild fluctuations in reported earnings/loss aren't conventionally seen in a positive light. Equally, the fact we're about to take on $8bn in debt (albeit on a fast repayment schedule) for the BNSF acquisition could reduce our ratings (and our apetite for taking on more debt anyway).

 

We're in the minority by greeting major market declines as a great opportunity and a source of far higher rates of return and far lower risk of permanent loss than are available normally. The higher future returns we can get from lower market prices will more than compensate for a slightly higher cost of capital, but that's not accepted by conventional wisdom. We're also in the minority by putting little-to-no premium on quarter-to-quarter smoothness of earnings, particularly when they contain mark-to-market paper gains and losses based far more on Mr Market's mood swings than on changes in IV.

 

Anyhow, a reduction of our last AAA rating by one notch to a still-very-good rating will add a little to the cost of debt capital that we probably don't wish to borrow in large amounts anyway and it may reduce how "good-for-our-promises" we appear as insurers by a tad. But if we remain the highest-rated of insurers and reinsurers, particularly for long-term deals, we retain our competitve advantage for those who must be sure of getting paid promptly after an insured event.