Fitch Puts Berkshire Hathaway On Rating Watch Negative

NU Online News Service, Nov.5, 3:34 p.m. EST

Berkshire Hathaway and its insurance subsidiaries, including GEICO, have been placed on Rating Watch Negative over its plans to buy Burlington Northern Santa Fe railroad, Fitch Ratings said.

Berkshire announced Tuesday that it had entered into a definitive agreement with Burlington Northern to acquire the 77 percent of the railroad's shares it does not already own in exchange for cash or Berkshire shares.

Berkshire said it expects the acquisition, which requires approval by holders of two-thirds of Burlington Northern outstanding shares and the Department of Justice, to close in the first quarter of 2010.

Berkshire's railroad purchase raises concerns, Fitch said, about Berkshire's asset profile and capitalization.

The rating firm said it views the acquisition, along with Berkshire's investments in utilities and energy and finance company subsidiaries, "as increasingly shifting the company's asset profile towards concentrated investments in operating subsidiaries that use more financial leverage and often have greater sensitivity to general economic conditions than the company's long-held insurance and holding-company equity oriented investments."

It said that historically both Berkshire's and its insurance subsidiaries' very high ratings have benefited from the overall organization's investments in the comparatively highly-rated insurance sector and from non-controlling equity investments the organizations made in a wide variety of businesses that generated significant capital growth.

These rating benefits, said Fitch, are coming under pressure at both the holding company and insurance operating company levels, as an increasing proportion of Berkshire's assets consist of solid, but comparatively lower credit-quality and less-liquid assets.

Fitch also believes, it said, that the railroad acquisition is likely to result in a meaningful increase in Berkshire's financial leverage, especially on a tangible capital basis. The acquisition will be funded by $8 billion of debt financing and $8 billion of internal funds.

Fitch noted that, Berkshire is paying a premium of roughly $20 billion over Burlington Northern's book value on June 30, and the firm believes the transaction could materially increase the amount of goodwill on Berkshire's balance sheet.

It also pointed out that Burlington Northern has $10 billion of outstanding debt, and said while it believes that that this debt is likely to be funded by railroad operations, the agency views it as an incremental contingent call on Berkshire's cash flows and capital.

The agency said it believes the acquisition is likely to close as currently conceived by Berkshire and anticipates conducting further analysis of the transaction and its potential effects on Berkshire over the coming weeks. It expects to resolve its Rating Watch on Berkshire's and its insurance subsidiaries' ratings, prior to the transaction's close.

Fitch's additional analysis, it said, will focus on assessing Burlington Northern's credit-quality and its impact on Berkshire's credit profile; evaluating the effect on the organization's leverage ratios of the incremental debt and investment concentrations derived from the transaction and reviewing interest coverage ratios generated by Burlington Northern and their effect on Berkshire's consolidated interest coverage ratios.

In addition to GEICO and General Reinsurance Corp. other insurance units of Berkshire include

General Star Indemnity Company; National Reinsurance Corporation; General Star National Insurance Company; Genesis Insurance Company; Genesis Indemnity Insurance Co.; Fairfield Insurance Company; National Indemnity Company; Columbia Insurance Company; National Fire and Marine Insurance Company; National Liability and Fire Insurance Company; National Indemnity Company of the South; National Indemnity Company of Mid-America and Wesco Financial Insurance Company.