Moody's Rates Berkshire Notes Issue - Analyst Blog


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

The $400 million notes with maturity of three years and $550 million of seven-year notes being issued by BHFC have been given Aa2 ratings, which are of  of investment grade. 

Cash from the issue of the notes will be utilized to pay off $950 million of BHFC notes maturing in mid-October. 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. It noted that Berkshire Hathaway has shown a superior operating profitability for the first half of 2013. As per Moody's estimates the Berkshire Hathaway parent carries a modest financial leverage of 11% and huge cash balance of around $20 billion. This signifies the company's strong capital position. 

However, a major concern with the rating agency  is the succession issue of Warren Buffett, who is at present both - the Chief Investment Officer and also the Chairman of Berkshire Hathaway. Also the company holds an above average equity concentration in the company's investment portfolio, which exposes income from investment to market volatility.

For BHFC the rating agency is confident that the company will be able to service its outstanding debt of 1.2 billion due in 2014, $1.5 billion in 2015 and $8.5 billion in 2016-43 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 of the credit profile of Berkshire's subsidiaries improves, and cash balance is continued to be maintained. 

A negative rating action may follow if credit profile deteriorates, 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 there is a significant decline in cash and equivalents on hand. 

Other Stocks 

Berkshire Hathaway retains a Zacks Rank #1 (Strong Buy). Other players from the same industry such as Alleghany Corp. ( Y ), Hanover Insurance Group Inc. ( THG ), Montpelier Re Holdings Ltd. ( MRH ) carrying Zacks Rank #1(Strong Buy) are also worth considering. 

BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report

BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report

MONTPELIER RE (MRH): Free Stock Analysis Report

HANOVER INSURAN (THG): Free Stock Analysis Report

ALLEGHANY CORP (Y): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: MRH , THG , Y

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