S&P Mulls Downgrade of Berkshire Hathaway Debt

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$32 billion is a lot to spend for anyone…even if your name is Warren Buffett. That’s why it’s not all that surprising to learn that ratings agency Standard & Poor’s is mulling a downgrade of Buffett’s Berkshire Hathaway holding company after its $32+ billion acquisition of Precision Castparts last week.

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S&P announced late Tuesday that it might have to downgrade Berkshire Hathaway Inc given the firm is spending a good chunk of its cash to finance its $32.3 billion buyout of aerospace firm Precision Castparts Corp.

Of note, Berkshire currently enjoys an "AA" credit rating from S&P, the third highest rating possible.

Spokespersons for Buffett and Berkshire have not yet responded to requests for comment.

Statement from S&P analyst

S&P analyst Laline Carvalho wrote in a report that the ratings agency may lower the mega-conglomerate's rating by one or two notches within the next quarter due to "uncertainty around the funding of the acquisition" in relation to cash resources and leverage at the parent.

Carvalho also noted the agency's review relates to Berkshire's "likely" need to pull capital from its insurance units to fund the acquisition, even given the firm's "substantial" cash resources.

Precision Castparts deal would take big chunk of Berkshire Hathaway's cash

In an interview on CNBC on Monday, Buffett commented that he plans to use about $23 billion of BH's $66.6 billion cash reserves to buy Precision Castparts, and will borrow the remainder

The deal puts a value of $37.2 billion including assumed debt on Precision Castparts, and it represents Berkshire Hathaway's largest-ever purchase. The acquisition is projected to close by April 2016.

Analysts highlight that a two-step downgrade from S&P would reduce Berkshire's rating to "A-plus," which is considered a medium investment grade. S&P could choose to not change Berkshire's credit rating after completing the review.

A downgrade could lead to an increase in the company's borrowing costs. S&P also noted it could reduce the "AA-plus" financial strength ratings for Berkshire's  insurance holding companies.

Fitch Ratings reaffirmed Berkshire's "AA-minus" rating, its fourth highest grade, with a stable outlook, on Monday.

On Tuesday, Moody's Investors Service also reaffirmed Berkshire's "Aa2" rating, roughly equal to S&P's "AA" rating, and also forecast a stable outlook for the firm.

Regardless of any ratings changes, we highly doubt Warren Buffett is losing any sleep over this.

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