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Moody's Takes Away Berkshire Hathaway's Top Rating, But Buffett Watcher Sees Little Impact

Published: Wednesday, 8 Apr 2009 | 5:28 PM ET

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By: Alex Crippen
Executive Producer

Warren Buffett's Berkshire Hathaway has lost its coveted top-level credit rating from Moody's Investors Service, but a well-known Buffett watcher and Berkshire investor says the move will have only a very small impact on the company, if there is any impact at all.

Tonight, Moody's downgraded Berkshire by two notches to Aa2 from Aaa. It's a more aggressive move than what we've seen from S&P and Fitch in recent weeks.

Moody's says severe stock price declines and the U.S. recession have weakened an important Berkshire reinsurance subsidiary.

The agency also lowered its insurance financial strength rating on that subsidiary, National Indemnity Company, along with the IFS ratings of other major Berkshire insurance units.

Moody's lead analyst for Berkshire is Bruce Ballentine. He's quoted in a Moody's news release (free registration required) as saying:

"Today's rating actions reflect the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession."

The release continues, "For National Indemnity, falling stock prices have reduced its investment portfolio value and, in turn, its capital cushion relative to ongoing insurance and investment exposures."

In addition, Moody's notes that the economic downturn has caused a "meaningful drop in earnings and cash flows" for some of Berkshire's non-insurance businesses.

Moody's says the outlook for its rating is now stable, indicating it has no plans to make further cuts over the next 12 to 18 months.

Hedge fund manager, value investor, and Warren Buffett fan Whitney Tilson tells me tonight the Moody's downgrade will have no effect on Berkshire's holdings, and only a very small potential impact on its earnings. It may face slightly higher borrowing costs, but Tilson notes that Berkshire has lots of cash and doesn't do much borrowing.

He also points out that Berkshire's derivatives positions don't require the company to put up additional collateral in the wake of a ratings downgrade.

He calls it "ludicrous" that Berkshire and General Electric [GE Loading... () ] now have the same credit rating from Moody's when Berkshire has roughly 10 times GE's tangible book value. He says the inconsistency "underscores why no sane investor should pay any attention to the credit rating agencies." In his view, they are "thoroughly discredited" at this point.

Tilson says he wouldn't be surprised if Moody's moved particularly aggressively on Berkshire to counteract suggestions from Connecticut Attorney General Richard Blumenthal that Berkshire's holdings of Moody's stock may have influenced the rating agency.

Berkshire is the biggest shareholder in Moody's [MCO Loading... () ], holding a 21 percent stake.

Tilson is scheduled to appear on CNBC's Fast Money with Melissa Lee tomorrow (Thursday) afternoon. The program begins at 5p ET. He estimates Berkshire's intrinsic value is around $115,000 a share, making the stock about 20 percent undervalued.

Last month, Standard & Poor's kept its AAA rating on Berkshire but lowered its outlook to "negative" from "stable." That's a sign there could be a downgrade over the next year.

Earlier in March, Fitch became the first of the big three credit raters to take action on Berkshire, downgrading Buffett's company one notch from its top AAA rating.

Fitch said that in light of "significant market volatility," AAA ratings are no longer appropriate for any financial firm.

Current Berkshire stock prices:

Class A: [US;BRK.A Loading... () ]