Berkshire-Hathaway faces downgrade; AAA rating endangered

Uber-investor Warren Buffett's Berkshire Hathaway (BRK.A) is in danger of losing its credit rating from Standard & Poor's, the credit rating firm said Tuesday, citing concerns that losses on equity investments are sapping the company's strength. Fitch Ratings, another big bond rater, already went a step further, downgrading Berkshire earlier this month, in part over similar worries.

If it seems like AAA-rated companies are becoming an endangered species, it's because they are. Generally speaking, big financial concerns like Berkshire don't warrant top credit ratings in such a volatile market, according to Fitch. And after downgrading General Electric (GE) earlier this month, S&P now bestows its top rating on the debt of just five industrial companies, and at least one of them is in danger of going the way of GE.

S&P's AAA club now includes only Automatic Data Processing (ADP), ExxonMobil (XOM), Johnson & Johnson (JNJ), Pfizer (PFE) and Microsoft (MSFT). And Pfizer's rating has been under review for possible downgrade since January.

That's a far cry from the early 1980's, when S&P found 32 companies worthy of their highest rating. Three decades ago, AT&T (T), Kraft Foods (KFT) and Procter & Gamble (PG) were all AAA-rated. So were General Motors (GM) and Ford (F). How times have changed.

Many formerly AAA-rated companies lost top marks on their bonds after they decided to take on more debt in an effort to expand. Others saw their credit ratings fall along with their business fortunes.

Expect the trend toward fewer top debt ratings to continue. The share of the bond market rated "AAA" or "AA" by Fitch, the company's top two ratings categories, fell from 31.4 percent to 23.1 percent last year. And nearly three in ten industrial companies rated by Fitch boasted "junk" ratings of "BB" or lower.

By raising companies' borrowing costs and plunging the banking industry into tumult, the financial crisis will likely bring on even more downgrades this year.

"While lack of liquidity is and remains the biggest 'killer' among large corporates, the depth and length of the recession will clearly have a more broadly‐felt negative impact on most companies' business risks, profitability and leverage profiles," Fitch analysts wrote in a report earlier this year.

Which is the next top-rated company to slip? Pfizer, already under review by S&P, has seen its "Aaa" rating from Moody's disappear thanks to its takeover of Wyeth (WYE) and the looming expiration of its patent on blockbuster cholesterol drug Lipitor.

Buffett's Berkshire Hathaway is another possibility. With Fitch already cutting its rating and S&P warning it may do likewise, only Moody's has been mum on the issue. One complication: Buffett and Berkshire own 20 percent of Moody's stock. If S&P follows suit, the pressure on Moody's will only rise.
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