Warren Buffett’s Berkshire Hathaway was stripped of its ‘AAA’ credit rating by Fitch Ratings, barely hours after S&P cut General Electric Co’s top-tier rating, as the global financial crisis pummels America’s corporate titans.
Citing concerns about Berkshire’s equity and derivatives investments, as well as Buffett’s tight grip on the company, ratings agency Fitch cut the insurance and investment company’s issuer default rating by one notch to ‘AA+’.
The downgrade is another setback to Buffett, 78, coming a day after the billionaire lost his position as the world’s richest man to Microsoft Inc founder Bill Gates, according to Forbes’ annual list. Buffett’s net worth plunged to $37 billion from $62 billion last year, the list said. “Fitch views the company’s potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the ‘AAA’ level,” the ratings agency said in its statement on Berkshire.
Those exposures include Berkshire’s equity investments, as well as its holdings of derivative contracts tied to equity and credit markets, Fitch said.
Fitch is the first major credit agency to cut Berkshire’s ‘AAA’ rating. The move comes after General Electric Co was stripped of its ‘AAA’ rating by Standard & Poor’s on Thursday.
Berkshire invested $3 billion last year in GE, buying preferred shares with the option of acquiring another $3 billion in common stock at $22.25 per share.
Known as the Sage of Omaha for his long history of successful investments, Buffett was caught out by the global financial crisis.
Berkshire’s net worth tumbled $10.9 billion in the final quarter of 2008 and profits fell 96 percent, due mostly to losses on derivatives contracts tied to the stock market. Berkshire had $4.65 billion of net investment and derivative losses in 2008.
TIED TO BUFFETT Buffett has defended his use of the derivatives, which helped drive Berkshire’s annual profit to a six-year low.
Investors should distinguish Berkshire’s derivatives from others that dramatically increased financial leverage, made banks “almost impossible for investors to understand,” and threatened the collapse of companies such as investment bank Bear Stearns Cos and mortgage financiers Fannie Mae and Freddie Mac, Buffett said in his annual letter to Berkshire shareholders.
Fitch also noted Berkshire remains too closely linked to Buffett to merit an ‘AAA’ rating. “Fitch views this risk as unrelated to Mr. Buffet’s age, but rather Fitch’s belief that BRK’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,” it said, referring to Berkshire.
Berkshire generates about half its results from insurance, including auto insurer Geico Corp, but operates more than 70 businesses that offer such things as carpeting, ice cream, paint, real estate services and underwear.
Fitch lowered Berkshire’s senior unsecured ratings by two notches to ‘AA’. However, it affirmed its ‘AAA’ insurer financial strength ratings on the company’s insurance and reinsurance subsidiaries. The ‘AAA’ ratings of the insurance subsidiaries “continue to reflect their strong capitalization and competitive positions, and underlying underwriting results,” Fitch said. The outlook for all of Berkshire’s entities is negative.
Fitch said the current ratings on Berkshire assume that the company will continue to aggressively deploy its cash and capital as companies look for investors with strong balance sheets.
Besides the cash infusion into GE, Berkshire has agreed to make a 3 billion Swiss franc investment in Swiss Re and has bought $5 billion worth of preferred shares of Goldman Sachs.
Berkshire Class A shares closed on Thursday at $87,500 on the New York Stock Exchange. They have fallen 34 percent over the past year, while the Standard & Poor’s 500 has dropped 43 percent.
(Additional reporting by Rafael Nam in HONG KONG; Editing by Lincoln Feast)