Why Berkshire's Downgrade Isn't Such a Bad Thing

Hedge fund Buffetteer: The ratings change is pretty much a non-event.


Moody's downgrade of Berkshire Hathaway Wednesday from Aaa to Aa2 isn't anything investors should get all worked up over.

(A primer: ratings, which measure the credit worthiness of a company's debt issues, are an assessment of a company's financial health. Moody's isn't the only ratings agency; others include Standard & Poor's and Fitch. Moody's downgrade came after Fitch and S&P cut their ratings last month.)

Another thing to know: bonds rated Aa are still considered high quality.

In an email dispatch yesterday, hedge fund manager and Buffett watcher Whitney Tilson weighed in on the downgrade:

This is pretty much a non-event for Berkshire and affects our estimate of intrinsic value insignificantly.  The cash, stocks and bonds obviously haven't changed in value and the earnings power of Berkshire will only be slightly impacted in two possible ways: 1) a tiny bit higher cost of debt (mitigated by the fact that Berkshire has a large net cash position overall) and 2) the downgrade might impact to a small degree the competitive advantage Berkshire has vs. other insurers when writing various insurance products, but doesn't change the fact that Berkshire is MASSIVELY better capitalized than any other insurer and everyone knows it.

Today wasn't all bad for Buffett: Berkshire Hathaway hit it big with a nearly 4 percent jump in share price after Wells Fargo--one of its largest holdings--shot up on an earnings surprise.

For more background on how ratings work, here's an explanation of how companies earn and lose the coveted AAA rating.