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Moody's Rates Berkshire's Notes Issue

Zacks Equity Research

Moody's Investors Service of Moody’s Corp. (MCO) has undertaken a rating action on the recently issued notes by Berkshire Hathaway Finance Corporation (:BHFC), a subsidiary of Berkshire Hathaway Inc. (BRK.B).

The $650 million notes due for maturity in Jan 2017 and $100 million notes due Aug 2018, issued by BHFC, have been given Aa2 ratings, which are of the investment grade.

Cash from the issue of the notes will be utilized to pay off $750 million of BHFC notes maturing this month. The rating agency kept the outlook for Berkshire and BHFC at stable.

Moody’s takes into account the strong operating performance at the parent company. Berkshire Hathaway has shown superior operating profitability for the first nine months of 2013, evident in a 16.3% increase in after-tax operating income to $11.4 billion as of Sep 30, 2013.

As per Moody’s estimates, the Berkshire Hathaway parent company carries a modest financial leverage of 11% and huge cash balance of around $20 billion. This signifies the company’s strong capital position.

However, some of the negatives facing the company include large stock investments which can cause earnings volatility. Another major concern with the rating agency is the succession issue of Warren Buffett, who is at present both the Chief Investment Officer and the Chairperson of Berkshire Hathaway.
With regard to BHFC, the rating agency is confident that the company will be able to service its outstanding debt of $400 million due in Jul 2014, $1.5 billion in 2015, $1.0 billion in 2016 and $8.3 billion in 2017-43 with the help of recent notes issue and continued capital support and guarantee from the parent.

Financial strength and credit ratings, which intend to measure a company’s ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence denote a company’s competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about the future performance of the unit.

A rating upgrade can happen if the credit profiles of Berkshire’s subsidiaries improve, and cash balance is steadily maintained.

On the other hand, a negative rating action may follow if the credit profiles deteriorate; financial leverage spikes above 15%; losses from reinsurance /insurance underwriting, investments and derivatives cause a 20% decline in shareholders' equity in a given year; or if there is a significant decline in cash and equivalents on hand.

Other Stocks to Consider

Berkshire Hathaway currently has a Zacks Rank #3 (Hold). Better-ranked stocks  in the same industry include Allied World Assurance Company Holdings, AG (AWH) and Aspen Insurance Holdings Ltd. (AHL). Both these stocks carry a Zacks Rank #1 (Strong Buy).

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