Did you ever hear the saying “when a pendulum swings too far one way, it then swings too far the other”?. This is your textbook example. Tonight Fitch has downgraded Berkshire Hathaway (BRK.A)
Below is the action from Fitch (hat tip to Zero Hedge for finding it).
BUT, to find out what this is really all about one need only read one paragraph in the whole document (click image to open larger).
As you read the document, the reasoning is …bizarre, for lack of a better word.
Berkshire was downgraded because:
1- There can be no AAA rated “holdings companies of financial oriented enterprises”.
2- Warren Buffett is old (they actually take pain to say “this is not age related”) Well, what else could it be? Berkshire’s corporate structure has not changed in 44 years and in reality, Berkshire now has a succession plan in place that was not there 4 years ago so the “risk” for anything other than age is less. But, Fitch says having the arguably the single best capital allocator in history at the helm is “too risky”. They would apparently prefer two mediocre ones?
3- Actually, there is no #3, just those two….
Here is what it is NOT due to:
1- Equity Index Puts
2- Derivative Contracts
3- Equity investment losses in 2008
4- Operating businesses
5- Insurance results
In other words, some legitimate reasons one would think a downgrade might be warranted.
After years of lumping BBB- mortgages together and then telling people they are now AAA and selling them as such only to watch them behave like, well CCC loans, Fitch is now telling us no AAA will be given to Co’s. with “financial oriented enterprises”. Let’s not forget, Fitch at one time told us AIG (AIG) was a AAA company. So, you know, we should take what they say “to the bank”.
For those who do not know about AIG, they are this cute little company that almost brought down the entire US financial system last year. It’s bailout will eventually cost US taxpayers well in excess of $100 billion. But, hey, they had a much younger guy running things over there so AAA was entirely warranted.
It matters not that Berkshire maintains at .25 debt to equity. It matters not that the roughly $9 billion in notes downgraded Warren could write a check for tomorrow and pay off without any impairment in Berkshire operations. It matter not also that Berkshire’s insurance operation generate $35 billion of float for Warren to invest for free……free….
Nope, we now have blanket rules at Fitch..
This decision flies in the face of all reason, logic and is not in the least based on operating results at Berkshire. It makes no sense…
Well, given what the ratings agencies have done for the last decade, I guess them making yet another decision that undermines the investing community’s faith in anything they say does make perfect sense…
BRK Downgrade
BRK Downgrade
Disclosure (“none” means no position):None
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2 replies on “Berkshire Hathaway Downgraded: Ratings Agencies Become More Irrrelevant”
It is quite shocking and I agree with your assessment.
The notes issued by Berkshire Hathaway Finance Corporation for the sole purpose of funding its Manufactured Homes Financing business (formerly Clayton). Basically, Clayton borrows money from its parent, who gets the money from issuing these notes through BHFC. Clayton then lends that money to people who buy their mortgages. In some cases, Clayton buys portfolios of these types of loans in distressed situations. The really interesting thing is that despite the fact that the typical lender is lower income and up to 1/3 of them are subprime class, the delinquency rates on these loans are only 3.6%, up from 2.9% two years ago.
In any case, Clayton has about $12.6 billion of these loans out there, and BHFC issued $10.8 billion of notes to finance. Clayton is profitable, with pre-tax earnings of $373 million (excl. one-time stuff) last year, and this is -after- paying BHFC 1% on top if its cost of borrowing.
So my point is, these notes are backed by real assets. Berkshire does not have to sell a thing to get it off the books – it merely has to sell Clayton, and would probably get a billion or two for it in the process!
As for GEICO ($150 mm) and Gen Re ($650 mm), those numbers are de minimis relative to, as you refer above, the float (plus the excess investments above the float amount) that Berkshire carries. Berkshire is generated about $6 billion of interest and dividend income off its $122 billion portfolio in the insurance group (the income figure is an estimate to include the recent deals they did with GE, GS, Mars/Wrigley, Harley, which were almost all above 10% rates). Which means he can pay off those loans from simply collecting dividends and interest for 49 days!
The vast majority of the remaining debt on the consolidated balance sheet is non-recourse. Most of that amount is at with his utility subsidiary MidAmerican which is on its own relatively unleveraged for a power utility business.
outstanding points…