Berkshire Hathaway No Longer AAA; Buffett Company’s Acquisition Of Burlington Northern Cited

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February 5, 2010 Friday FIRST EDITION

SECTION: MONEY; Pg. 2B

LENGTH: 407 words

HEADLINE: Berkshire Hathaway no longer AAA; Buffett company’s acquisition of Burlington Northern cited

BYLINE: Matt Krantz

Warren Buffett can no longer brag about getting straight A’s.

Standard & Poor’s cut its credit rating on Buffett’s Berkshire Hathaway Thursday from the coveted AAA rating by one notch to AA+. Berkshire Hathaway had been a member of the elite and dwindling club of companies with AAA ratings since 1989.

S&P’s cut is in reaction to Berkshire’s recent purchase of the rest of the Burlington Northern Santa Fe railroad for $26 billion. The deal underscores how big of a bet Berkshire is making on the acquisition, according to S&P’s report.

There’s little immediate financial loss to Berkshire by losing the AAA rating, which is mostly a point of pride for companies, as the interest rate investors are paid on debt issued by AAA-rated companies tends to be very close to debt from AA+ companies.

Still, investors are taking note of the downgrade as a rare case where Berkshire isn’t perfect anymore. Berkshire class A shares Thursday fell $2,800 to $108,900, amid a market sell-off.

Being AAA “reflected well on the way (Buffett) ran the business,” says Jeff Matthews of investment firm Ram Partners, and a Berkshire shareholder.

S&P is the last of the three major credit agencies to cut Berkshire’s ratings. Moody’s cut its rating one notch last April, and Fitch Ratings downgraded it by a notch last March.

Even so, the cut is notable to investors because it shows the:

*Erosion of the creditworthiness of U.S. companies. There were more than 60 U.S. non-financial companies with AAA ratings in the early 1980s, S&P says. Now, just four AAA industrial companies are left: Automatic Data Processing, ExxonMobil, Johnson & Johnson and Microsoft, S&P says. Separately, 18 financial companies are still considered AAA. “Clearly, it’s something companies don’t want to lose,” says S&P’s Diane Vazza of AAA ratings.

*Rising riskiness of Berkshire business structure. The Burlington deal represents a massive bet by the company and uses up a pile of the company’s cash reserves, Matthews says. Berkshire has “taken all the chips from the pile and pushed them into the center of the table,” he says.

*Awareness of financial risk. Berkshire’s ratings still top most rivals’, but the downgrade underscores the innate risk of the financial industry, says Meyer Shields of Stifel Nicolaus.

Seeing Berkshire’s fall shows how global competition is making a perfect rating harder to keep, says Marilyn Cohen of Envision Capital. “It’s a sign of the times,” she says.

LOAD-DATE: February 5, 2010