Moody’s Strips Its Biggest Investor of Top Credit Rating

By Don Miller
Associate Editor
Money Morning

Moody's Investors Service (MCO), today (Thursday) cut Berkshire Hathaway Inc.'s (BRK.A, BRK.B) top-level Aaa credit rating by two notches, despite Berkshire chief Warren Buffett's status as the ratings agency's biggest shareholder.  

Moody's was the last major ratings agency to downgrade the Berkshire, after Fitch Ratings Inc. stripped the company of its top rating almost four weeks ago, saying it believed "AAA ratings are not appropriate at the holding company level for financial-oriented enterprises."

Standard & Poor's Inc. followed two weeks later with an announcement it had placed Berkshire's credit under review. 

With the cut to Berkshire's rating Moody's no longer has a Aaa rating on any significant financial-services company. In fact, only four companies of any kind still have triple-A ratings from both S&P and Moody's: American Data Processing (ADP), ExxonMobil Corp. (XOM), Johnson & Johnson (JNJ), and Toyota Motor Corp. (ADR: TM).

Moody's, whose parent company is 20%-owned by Berkshire, risked losing credibility by standing firm with its credit rating on Berkshire. With the double-notch downgrade, it may have chosen credibility over upsetting its largest shareholder.

"There's a bit of a 'covering your backside' mentality with the ratings firms," Justin Fuller, a partner at Midway Capital Research & Management who runs the Web site told Bloomberg News. "The new thinking seems to be that you can't have any companies out there with a triple-A rating anymore."

In the past, Buffet has denied having any influence over credit ratings assigned to Berkshire.

"It would be wrong if we tried to pressure Moody's but that's never happened," Buffett said in an interview in May 2008. "I have no contact with the management of Moody's. I can't recall ever calling them in my life."

The rating was cut two levels to Aa2 on "the severe decline in equity markets over the past year as well as the protracted economic recession," Bruce Ballentine, a Moody's analyst, said in a statement.

The downgrades come more than a month after Berkshire reported a 62% drop in profit, the worst annual performance since Buffett took over in 1965.  
Moody's also downgraded credit ratings on Berkshire insurance units Geico Corp., General Re Corp. and National Indemnity Co. Insurers count on stellar credit ratings to minimize the cost of raising capital and convince policyholders their claims will be paid.

The credit rating reviews may have already cost Berkshire in the bond market. Berkshire sold a $750 million triple-A-rated debt offering last week at 4%, while Fannie Mae (FNM), Freddie Mac (FRE), Citigroup Inc. (C), and Bank of America Corp. (BAC),-- who lost a total of $108.8 billion last year--all found buyers for notes paying 2.375% or less.

Buffett referred to the irony of the situation in his latest annual letter, published to shareholders on Feb. 28. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one," he said.

But for some analysts, the downgrades are simply confirmation that no company is immune from the current financial turmoil. 

"This has been the most critical financial environment of our lifetimes," Michael Holland, head of New York-based investment firm Holland & Co, which holds Berkshire shares told Reuters. "Any financial company, including Warren Buffett's, has been affected by it. Moody's is saying it is so, long after the fact."

Still, even though there has been an increase the "short interest" against Berkshire stock, not many are willing to bet against Buffett long-term.

Back in 1999-2000, when Buffett declined to participate in Internet mania, critics were saying he'd finally lost his touch and Berkshire's share price was cut in half. Then, after the Nasdaq crashed, Berkshire doubled in less than three years.

In the recent market crash, the company's share price lost over half its December 2007 value of $151,000 per share. It's now up 29% off its recent bottom of near $70,000, outperforming the S&P 500 by about 3%. 

Buffett is known for using market swoons to purchase assets on the cheap for long-term gains.  No doubt he's playing off that strategy again, and Moody's may yet benefit from having him as its largest shareholder.

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