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Standard & Poor's lowers Berkshire Hathaway to AA

Staff writer |
Standard & Poor's has lowered its counterparty credit rating on Berkshire Hathaway to AA from AA+ and affirmed its AA+ insurance financial strength ratings on BRK's core subsidiaries.

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The outlook on all ratings is negative. At the same time, Standard & Poor's assigned 'AA' senior debt rating to Berkshire Hathaway Finance Corp.'s $1 billion senior unsecured notes. BHFC has issued the notes in two tranches: $500 million 1.3% senior unsecured notes due May 15, 2018, and $500 million 4.3% senior unsecured notes due May 15, 2043. The company used the proceeds of this issue to repay $1.0 billion of senior notes maturing on May 15, 2013.

BRK fully guarantees BHFC's new note issuance. BHFC's borrowings are used to fund the finance operations of Vanderbilt Mortgage & Finance Inc., a wholly owned subsidiary of Clayton Homes Inc., a vertically integrated manufactured housing company.

"The lower credit rating on BRK better reflects our view of BRK's dependence on its core insurance operations for most of its dividend income," said Standard & Poor's credit analyst John Iten.

Its non-insurance business segments generate a majority of BRK's operating income, but aside from the insurance subsidiaries only Burlington Northern Santa Fe LLC (BNSF) has provided a significant portion of the total dividends paid from the operating companies to the holding company.

The outlook is negative for two reasons. One is the sovereign rating cap of AA+/Negative which applies to the obligations of the U.S. government, government-related enterprises, and U.S. financial services firms.

The second reason is that Standard & Poor's could lower the rating if the capital adequacy according to its capital model of BRK's insurance operations relative to its risk profile deteriorates as a result of a material increase in investment risk exposure or the funding of a large acquisition by the insurance companies.

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