S&P may cut Berkshire AAA rating on Burlington buy

(Reuters)

Standard & Poor's said on Wednesday it may cut Berkshire Hathaway Inc's coveted AAA rating, citing the company's plan to acquire Burlington Northern Santa Fe Corp, Berkshire's largest deal to date.

A significant part of the cash portion of the acquisition will likely come from Berkshire's core insurance operations, reducing their liquidity and capital adequacy, S&P said in a statement.

Warren Buffett's Berkshire Hathaway agreed to pay USD 26 billion in cash and stock to buy Burlington in a bet the railroad operator will benefit from a recovering US economy. Berkshire is also assuming about USD 10 billion of Burlington debt.

Berkshire would pay about USD 16 billion in cash, of which USD 8 billion would be from its own funds and the rest from debt.

"The capital adequacy of the insurance operations has declined over the past year, reflecting the drop in market value of Berkshire's extensive portfolio of equity holdings, which the insurance subsidiaries hold," S&P said in a statement.

Berkshire's investments in Goldman Sachs Group Inc, General Electric Co, Wm Wrigley Jr Co and Swiss Re have also reduced insurance company liquidity, S&P said.

In addition, Berkshire's insurance companies already own a large amount of Burlington stock, so any additional shares would increase their concentration risk, S&P said.

Any rating downgrade would likely be no more than two notches, S&P said.

S&P also said it may raise Burlington Northern's rating, probably no more than one notch, to BBB-plus, the third-lowest investment grade.

S&P would be the third major rating agency to strip Berkshire of its AAA rating. Moody's downgraded the company by two notches to Aa2 in April, while Fitch cut Berkshire to AA-plus in March.

Moody's affirmed Berkshire's Aa2 rating on Tuesday, saying it expects Berkshire to keep a large cash balance and conservative financial profile, consistent with its long-standing practice.