S&P: Berkshire Hathaway Risks Ratings Cut Over $37.2B Acquisition

August 11, 2015

News this week that Berkshire Hathaway Inc. plans to spend $37.2 billion to acquire Precision Castparts Inc. is troubling Standard & Poor’s. The ratings stalwart placed the company and its insurance subsidiaries on CreditWatch Negative based on concerns over how the deal will be financed.

The details: S&P said it put Berkshire Hathaway’s ‘AA’ long-term counterparty credit and senior unsecured debt ratings, and also the ‘AA+’ financial strength and long-term counterparty credit ratings on Berkshire Hathaway’s core insurance subsidiaries, on CreditWatch Negative.

Standard & Poor’s explained its decision was based on “uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level.”

Additionally, the ratings entity said it believes that Berkshire Hathaway will use some capital resources available at its insurance companies to fund the deal.

Standard & Poor’s said it sees consolidated capital adequacy at Berkshire Hathaway’s insurance subsidiaries to be “redundant at the ‘AAA’ level.” As well, it said the holdings company ratings as they currently stand reflect a perception of “substantial cash resources and conservative adjusted financial leverage and fixed-charge coverage.”

Worth noting as well, via S&P: Berkshire Hathaway had $9.4 billion in cash at the holding-company level at the end of 2014.

Standard & Poor’s said it will monitor developments relating to the M&A deal over the next three months. Plans call for updating or resolving the CreditWatch listing after meeting with Berkshire Hathaway management to discuss issues including holding-company cash, clash flow, capital adequacy and consolidated earnings.

This is Warren Buffett’s 50th year running Berkshire Hathaway, which saw a drop in second quarter net income after losses in the conglomerate’s GEICO and reinsurance arms.

Source: Standard & Poor’s