CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned 'A+(EXP)' ratings to four new senior notes issued by Berkshire Hathaway Inc. (NYSE:BRK) and its wholly owned finance subsidiary Berkshire Hathaway Finance Corporation (BHFC) totalling $2 billion. The offerings include $750 million of senior unsecured notes issued by BRK and $1.25 billion of senior notes issued by (BHFC) which are fully and unconditionally guaranteed by the parent.
The proceeds of the note issuances from BRK will be used to refinance $750 million of 2.2% senior notes maturing this month. The proceeds from the BHFC notes will be used to refinance $1 billion of 0.95% senior notes that matured this month as well as provide funds for general corporate purposes.
KEY RATING DRIVERS
BRK's consolidated financial leverage ratio was 28% as of June 30, 2016 and this ratio is not expected to change since the issuance is essentially refinancing maturing debt. Further, this level of financial leverage would not trigger any rating sensitivities, however, BRK is approaching Fitch's limits on financial leverage and interest coverage. Consequently, a material acquisition funded with significant amounts of debt would place downward pressure on BRK's ratings.
Consolidated interest coverage in the first half of 2016 was 7.4x excluding realized investment gains and losses on derivatives, which is below Fitch's expectations of 12x for companies at BRK's rating level. An alternate calculation of interest coverage, excluding railroad, utilities and energy, was 14.5x in the first half of 2016 and is consistent with the current rating category.
RATING SENSITIVITIES
Key rating triggers that could lead to a future downgrade include:
--Deterioration in the credit quality of key insurance subsidiaries (National Indemnity, GenRe, and GEICO) that is no longer consistent with the current 'AA+' rating. Measures of credit quality include Fitch's judgment of capitalization, a total financing and commitments ratio greater than 1.5x, net leverage (excluding affiliated investments) over 3.5x or a sharp and persistent reduction in underwriting profits.
--A consolidated run-rate debt-to-total capital ratio that exceeds 30% or a run-rate debt-to-total capital ratio from the holding company, insurance and finance operations (including debt issued or guaranteed by the holding company) that exceeds 25%.
--Material increases in leveraged equity market exposure such as its equity index put derivative portfolio.
--Acquisitions or other actions that reduce outstanding cash below $10 billion or approximately 5x consolidated interest expense.
Key rating triggers that could lead to an upgrade include:
--A commitment to lower debt-to-tangible capital ratios attributed to the holding company, insurance and finance operations. Fitch believes that this would likely require the scaling back of the finance operations.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Berkshire Hathaway, Inc.
--$500 million 1.15% senior notes due August 2018 'A+(EXP)';
--$200 million floating rate senior notes due August 2018 'A+(EXP).
Berkshire Hathaway Finance Corporation (BHFC)
--$1 billion 1.3% senior notes due August 2019 'A+(EXP)';
--$250 million floating rate senior notes due August 2019 'A+(EXP)'.
Relevant Rating Committee: July 18, 2016.
Additional information is available at www.fitchratings.com.
Although BRK's General Reinsurance Corp. subsidiary participated directly in the rating process, BRK did not participate other than through the medium of its public disclosure.
Applicable Criteria
Insurance Rating Methodology (pub. 17 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010249
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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