Ah, the mighty are fallen, or more accurately, falling.
Fitch is generally the first to whack ratings (unless you count the feisty but not given sufficient credit newcomer, Egan Jones).
Note this does not (yet) appear to affect Berkshire’s new muni bond guarantee business, since the insurance and reinsurance units kept their top ratings, albeit with a negative outlook.
Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses on the insurer’s equity and derivatives holdings.
Buffett’s role as chief investment officer also puts the company at risk if he becomes unable to do the job, Fitch said in a statement. Fitch cut the so-called issuer default rating on Berkshire to AA+, and senior unsecured debt to AA….
“Fitch views this risk as unrelated to Mr. Buffett’s age, but rather Fitch’s belief that Berkshire’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett,” Fitch said….
The company is backing derivatives pegged to corporate junk bonds, municipal debt and the performance of stock indexes on three continents, with liability of more than $14 billion as of Dec. 31.
Buffett said in an e-mail in November that collateral calls from the institutions on the opposite side of his derivative bets are “under any circumstances, very minor.” In a Bloomberg Television interview conducted last week, Buffett said he plans to sell more derivative contracts, which he personally negotiates. Some investors have said the derivatives may saddle the insurer with billions of dollars in losses…
The $37.1 billion in equity puts tied to four of the world’s stock markets — the largest portion of the derivative contracts — have “no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit rating,” said the company’s latest annual report, released this month.
Buffett will “likely make money on at least the index put contracts,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “Even if he didn’t, his balance sheet would in no way be as weak as GE’s.”