S&P has cut its rating on Berkshire Hathaway by one notch, citing the company’s dependence on its core insurance operations for most of its dividend income

Updated May 16, 2013, 9:53 a.m. ET

S&P Cuts Rating on Berkshire Hathaway

By ERIK HOLM

Warren Buffett’s Berkshire Hathaway Inc. BRKB -0.68% had its credit rating cut one notch to double-A by Standard & Poor’s, which cited the conglomerate’s reliance on its insurance operations.

The downgrade comes after S&P revised the criteria it uses to evaluate the creditworthiness of insurers. The ratings company said the move was fueled by Berkshire’s “dependence on its core insurance operations for most of its dividend income.”

Berkshire-owned railroad Burlington Northern is the only non-insurance subsidiary to provide a “significant portion of the total dividends paid from the operating companies to the holding company,” S&P said.Until the financial crisis, S&P and other ratings firms had long given Berkshire a gold-plated triple-A rating. They began to downgrade Mr. Buffett’s conglomerate beginning in March 2009, citing worries about the company’s derivatives portfolio, questions about who would succeed Mr. Buffett and other factors. In its downgrade Thursday, S&P again cited “management succession” as a negative factor that influenced its ratings.

The downgrade is likely to have little effect on Berkshire for the foreseeable future. When Berkshire lost its triple-A rating, there was no effect on borrowing costs when Berkshire subsidiaries turned to debt markets for funding. And while Berkshire has a substantial portfolio of derivative contracts, most don’t have collateral requirements that would force Mr. Buffett’s company to set aside funds even if its ratings take a far deeper cut.

S&P said its ratings outlook was negative, meaning Berkshire could eventually face another cut. The ratings firm said it could lower the rating if capital levels at the insurance operations deteriorate. In addition, S&P said the negative outlook reflected its view of the creditworthiness of the U.S. government, as its rating for the U.S. can limit the ratings it can give to U.S. financial companies.

The ratings company pointed to Berkshire’s “very strong financial risk profile, built on an extremely strong competitive position and very strong capital and earnings.” It said these factors are offset to some extent by the company’s high tolerance for equity investments, which has resulted in volatility in the company’s insurance subsidiaries’ statutory capital.

The cut leaves Berkshire eight steps above speculative-grade territory and two steps below triple-A.

Berkshire’s Class A shares edged down 0.4% to $168,210 in morning trading. The stock has risen about 40% in the past year.

May 16, 2013

Berkshire Hathaway’s Downgrade Will Have Little Effect

By Erik Holm

When Berkshire Hathaway BRKB -0.68%lost its AAA rating amid the financial crisis, the move had no effect on its borrowing costs, and that’s likely to be the case againamid today’s cut by S&P.

In addition, it appears no collateral calls are triggered by the move.

While Berkshire has a rather substantial derivative portfolio, most of the equity-index puts and credit-default contracts have no collateral requirements.

And, according to its 2012 annual report, it would take a far-greater downgrade–to A- (today’s move was to AA, four notches higher)–for Berkshire to post any additional capital on the few contracts which do have collateral requirements.