Berkshire Hathaway (BRK-A) and Core Insurance Subsidiaries May be Cut by S&P

Standard & Poor's Ratings Services said today that it placed its 'AA' long-term counterparty credit and senior unsecured debt ratings on Berkshire Hathaway Inc. (BRK) and its 'AA+' financial strength and long-term counterparty credit ratings on BRK's core insurance subsidiaries on CreditWatch Negative. We also placed our 'AA' financial strength and counterparty credit ratings on CSI Life Insurance Co. and Central States Indemnity Co. of Omaha, which we view as highly strategic to BRK, on CreditWatch Negative.

"The CreditWatch placement follows BRK's announcement that it has reached a definitive agreement to acquire Precision Castparts Corp. (PCC) for $37.2 billion, including PCC's net debt. We expect the acquisition to close in first-quarter 2016," said Standard & Poor's credit analyst Laline Carvalho.

The CreditWatch placement reflects uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level. In addition, we believe that to fund the acquisition, BRK is likely to use some of the capital resources available at its insurance companies. Currently we view the consolidated capital adequacy at BRK's insurance subsidiaries as redundant at the 'AAA' level. The ratings on the holding company also consider our view that it benefits from substantial cash resources and conservative adjusted financial leverage and fixed-charge coverage. As of year-end 2014, BRK had $9.4 billion in cash at the ultimate holding-company level. BRK's adjusted financial leverage (excluding the separately rated subsidiaries Berkshire Hathaway Energy Co. and Burlington Northern Santa Fe LLC and the borrowings used to fund the finance operations of Vanderbilt Mortgage & Finance Inc.) was 10% and EBITDA fixed-charge coverage was about 18x as of June 30, 2015.

We will monitor developments related to this transaction and expect to update or resolve the CreditWatch listing within the next 90 days, following discussions with BRK's management on prospective holding-company cash and leverage metrics, capital adequacy at the insurance companies, and consolidated earnings and cash-flow metrics. The negative CreditWatch implications indicate that we could affirm or lower the ratings following our review. We would expect that if we were to lower our ratings on BRK, the downgrade on the holding companies and operating companies would not exceed one to two notches, including a potential widening of the notching between the holding companies and operating companies.

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