Research Update:
Berkshire Hathaway Inc. AndVarious Affiliates Ratings Placed OnWatch Negative On PlannedAcquisition
Primary Credit Analyst:
John Iten, New York (1) 212-438-1757;john_iten@standardandpoors.com
Secondary Credit Analyst:
Damien Magarelli, New York (1) 212-438-6975;damien_magarelli@standardandpoors.com
Table Of Contents
November 4, 2009
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Research Update:
Berkshire Hathaway Inc. And Various AffiliatesRatings Placed On Watch Negative On PlannedAcquisition
Overview
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Berkshire Hathaway is acquiring Burlington Northern Santa Fe forapproximately $44 billion, in a cash and stock transaction.
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We expect that a significant part of the cash portion will come fromBerkshire's core insurance operations, as has historically been the casein other transactions.
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We are placing the ratings on Berkshire and various affiliates onCreditWatch with negative implications.
Rating Action
On Nov. 4, 2009, Standard & Poor's Ratings Services placed its ratings onBerkshire Hathaway Inc. (BRK) and various affiliates on CreditWatch withnegative implications following the company's announcement that it willacquire Burlington Northern Santa Fe Corp. (BNSF). The transaction is valuedat approximately $44 billion, including the assumption of approximately $10billion of BNSF debt, making it BRK's largest acquisition to date. BRK alreadyowns nearly 23% of the stock of BNSF. The acquisition of the remaining shareswill be financed with a combination of 60% cash and 40% through the issuanceof new BRK shares.Standard & Poor's expects that a significant part of the cash portionwill come from BRK's core insurance operations, as has historically been thecase in other transactions.
Rationale
We believe that this transaction will decrease the liquidity and capitaladequacy of the insurance operations. For the consolidated organization,financial leverage will increase and fixed-charge coverage may decline.The capital adequacy of the insurance operations has declined over thepast year, reflecting the drop in the market value of BRK's extensiveportfolio of equity holdings, which the insurance subsidiaries hold. This wasthe primary reason for our decision to change the outlook on all BRK ratingsto negative from stable on March 24, 2009 (see research update). Moreover, theinsurance operations over the past 12 months have been the buyers of BRK'swell-publicized investments in Goldman Sachs, General Electric Co., WM.Wrigley Jr. Co., and Swiss Re. These large investments have attractive couponsand are boosting investment income, but have also increased the exposure ofthe insurance companies' statutory capital to equities and speculative-gradebonds. The investments have also reduced insurance company liquidity, as BRK
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paid for them primarily out of cash and short-term investments and not fromthe sale of longer-term investments. The insurance companies already own asubstantial amount of BNSF stock, so any further share purchases will increasethe concentration risk associated with having a substantial portion ofinvested assets in securities of one company.The recession has hurt consolidated earnings. Pretax income for the firsthalf of 2009 declined to $2.3 billion from $5.9 billion in the prior yearperiod, reflecting lower operating income from BRK's manufacturing, service,and retailing business segment and higher investment and derivative losses.Financial leverage, excluding the borrowings of separately rated MidAmericanEnergy Holdings Co. and its regulated utility subsidiaries, was about 16% atJune 30, 2009.
CreditWatch
As the full details of this transaction become available, we will evaluate theimpact on the liquidity and capital adequacy of the insurance operations, aswell as the implications for liquidity, earnings, financial leverage, andfixed-charge coverage of the consolidated organization and the holdingcompany. We expect to complete our analysis and remove the company fromCreditWatch within 90 days. We currently expect that any ratings change wouldbe by no more than two notches.
Related Research
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"Berkshire Hathaway Inc. And Related Entities Outlook Revised ToNegative; Ratings Affirmed," March 24, 2009
Ratings List
CreditWatch ActionTo FromBerkshire Hathaway Inc.General Re Corp.Berkshire Hathaway International Insurance Ltd.Counterparty Credit Rating AAA/Watch Neg/A-1+ AAA/Negative/A-1+Berkshire Hathaway Assurance Corp.Wesco-Financial Insurance Co.Redwood Fire & Casualty Insurance Co.National Reinsurance Corp.National Liability & Fire Insurance Co.National Indemnity Co. of the SouthNational Indemnity Co. of Mid-AmericaNational Indemnity Co.National Fire & Marine Insurance Co.Medical Protective Co.Koelnische Rueckversicherungs-Gesellschaft AGKoelnische Rueckversicherung Gesellschaft AG, Niederlassung Wien
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Research Update: Berkshire Hathaway Inc. And Various Affiliates Ratings Placed On Watch Negative On Planned Acquisition
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S&P Puts Berkshire on Credit Watch Negative post-Burlington
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