Fitch ratings have conferred a rating of ‘A+’ on new issue of notes by Berkshire Hathaway Finance Corp. This is a unit of Berkshire Hathaway Inc. under (BRK.A) and (BRK.B).
The issue was made in two parts – $275 million, 1.6% coupon, maturing in 2017 and $225 million, 3% coupon, maturing in 2022. The proceeds from the issue will be used to repay the current maturing debt.
The ratings are of an investment grade status. The rating acknowledges Berkshire’s very strong balance sheet position featured by sufficient liquidity and flexibility, deep market reach, strong operating results, and significant diversification. These strengths differentiate Berkshire’s insurance companies from the competitors – Assurant Inc. (AIZ), W.R. Berkley Corp. (WRB) and Reinsurance Group of America Inc. (RGA).
However, the rating agency is concerned with a substantial degree of risk in the company investment portfolio due to high concentration of equity in its investment portfolio.
Other issues facing the company are related to the succession of the company’s Chairman Warren Buffet, and exposure to natural catastrophes, along with acquisition related issues.
Berkshire has a moderate degree of financial leverage (25% as of Sep 30, 2012). The company also has an adequate cushion for paying interest witnessed by interest coverage, which stands at 8x. The rating agency is assured of any deterioration in its leverage ratio as well as debt servicing capability of the company by the issue of debt.
Factors which could lead to a rating upgrade include maintenance of low level of debt to tangible capital. However a negative rating action can spring from an increase in debt-to-tangible capital ratio above 30%, increase in exposure to equity derivatives, reduction in outstanding cash below $10 billion or approximately 5x consolidated interest expense.
The stock retains a Zacks Rank #3 (Hold).
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