Buffett Cuts $16 Billion U.S. Municipal Credit Bet in Half

NEW YORK (Reuters) - Berkshire Hathaway Inc will terminate half of its bullish $16 billion bet on the credit quality of U.S. states, cities and towns, and has also cut its exposure to high yield corporate debt, it said in a regulatory filing this month.

The move comes as many investors including Berkshire Chairman, billionaire investor Warren Buffett, foresee an uptick in U.S. municipal bankruptcies.

Buffett said last month that the bankruptcies of three California cities in as many weeks was making traditionally objectionable Chapter 9 municipal bankruptcy filings more palatable to local governments in financial crises.

Berkshire sells protection against the default of states, towns and cities using credit default swaps. In these contracts the company would be required to reimburse its counterparty for debt losses in the event of a municipal bankruptcy.

Berkshire said it reached an agreement with a counterparty to terminate $8.25 billion of these positions. The portfolio includes insurance on over 500 state and municipal debt issuers and had a weighted average maturity of 8.8 years as of the end of June, the company said.

The Wall Street Journal earlier reported the termination.

A credit default swap index based on municipal debt showed a modest deterioration in perceptions of municipal credit quality in the second quarter, widening from 150 basis points at the end of March to 176 basis points at the end of the June, according to data provider Markit.

That means it would cost $176,000 per year to insure $10 million in debt for five years. The index has since retraced to 158 basis points, Markit data show.

Berkshire also reduced its exposure to CDS backed by high yield corporate debt in the first half of the year, to $3.26 billion, from $4.57 billion at the end of 2011, it said in the filing.

The company said that it has taken no new CDS positions in 2011 and 2012.

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