Zacks_Analysts' Blog : Berkshire Rating Cut on Debt Issue - Analyst Blog

Last week, Berkshire Hathaway Inc. (BRK.A, BRK.B) announced the issue of $8 billion notes in connection with the previously announced acquisition of Burlington Northern Santa Fe Corporation, or BNSF (BNI). Following this announcement, rating agency Standard & Poor’s (S&P) stripped the company of its AAA ratings.

S&P downgraded the rating to AA+ from AAA, citing concerns that the $8 billion issue of debt will strain the Berkshire’s capital adequacy. The rating was placed on credit watch last November when the plans for rail acquisition were announced. The outlook for the rating remains stable.

In March of last year, Fitch downgraded Berkshire’s Insurance and Investment company's issuer default rating by one notch to AA+. The rating actions were on concerns of the company’s exposure to derivative contracts tied to equity and credit markets. The rating agency is also concerned about the acquisition, and has placed Berkshire on a negative watch list.

 

Following the March downgrade, Moody’s in April also made a similar move by downgrading the long-term issuer rating of Berkshire to Aa2 from its top Aaa.

The rail acquisition will also add another $10 billion of existing debt in the books. It might further create a strain on cash flows and capital.

JPMorgan, a unit of JPMorgan Chase & Co. (JPM) and Wells Fargo Securities, a unit of Wells Fargo & Co. (WFC) will manage the issue. The securities are mostly short-term debt, including two-year fixed-rate notes at 65 basis points over Treasuries, three-year fixed-rate notes at 85 basis points over Treasuries and five-year fixed-rate notes at 95 basis points over Treasuries.

Berkshire has wide-ranging businesses from jewellery to home décor, from candies to insurance. But the rail acquisition, one of the biggest to date, will make the company increasingly complex. Moreover, there remains a cloud of skepticism over the succession of Warren Buffett, who is 79.

Valued at $34 billion, the acquisition is expected to close this month, after shareholders’ approval.