OptionsTrader
03-12-2009, 06:10 PM
http://www.bloomberg.com/apps/news?pid=20601109&sid=ajBmZZIBU9Vk&s=polyhoo
Buffett’s Berkshire Has AAA Debt Rating Cut by Fitch (Update1)
By Erik Holm
March 12 (Bloomberg) -- Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses in the insurer’s equity and derivatives holdings.
Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said.
“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’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,” Fitch said. Buffett is 78.
Berkshire joins General Electric Co., which was downgraded by Standard & Poor’s today and lost its status as one of the remaining AAA financial companies in the U.S. The action follows a 35 percent drop in Berkshire’s stock in 12 months triggered by concern that Buffett’s bets on derivatives -- which he has called “financial weapons of mass destruction” -- will crush profit at the firm.
Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the Omaha, Nebraska-based company’s 2008 annual report. The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.
More Derivatives
Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses.
“Oh, we’ll continue,” Buffett said. “We do anything that I think I understand and where I think that the odds strongly favor making money, which doesn’t mean you make money every time.”
The $37.1 billion in equity puts tied to four of the world’s stock markets -- the largest portion of the derivative contracts -- have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” according to the company’s latest annual report, released this month.
Who’s AAA?
Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.
“If Berkshire isn’t triple A, I’m not sure which company would be,” Buffett said in a Bloomberg interview at last year’s annual shareholders’ meeting.
Buffett’s Berkshire Has AAA Debt Rating Cut by Fitch (Update1)
By Erik Holm
March 12 (Bloomberg) -- Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses in the insurer’s equity and derivatives holdings.
Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA. The insurance and reinsurance units kept their AAA status, with a negative outlook for all entities, Fitch said.
“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’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,” Fitch said. Buffett is 78.
Berkshire joins General Electric Co., which was downgraded by Standard & Poor’s today and lost its status as one of the remaining AAA financial companies in the U.S. The action follows a 35 percent drop in Berkshire’s stock in 12 months triggered by concern that Buffett’s bets on derivatives -- which he has called “financial weapons of mass destruction” -- will crush profit at the firm.
Berkshire has outperformed the S&P 500 Index in 38 of the 44 years Buffett has run the firm and handled its investments, according to the Omaha, Nebraska-based company’s 2008 annual report. The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.
More Derivatives
Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses.
“Oh, we’ll continue,” Buffett said. “We do anything that I think I understand and where I think that the odds strongly favor making money, which doesn’t mean you make money every time.”
The $37.1 billion in equity puts tied to four of the world’s stock markets -- the largest portion of the derivative contracts -- have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” according to the company’s latest annual report, released this month.
Who’s AAA?
Insurers depend on high credit ratings to keep down the cost of raising capital and reassure policy holders that their claims will be covered.
“If Berkshire isn’t triple A, I’m not sure which company would be,” Buffett said in a Bloomberg interview at last year’s annual shareholders’ meeting.