According to a Bloomberg article posted today, Moody’s has come to the conclusion that credit default swaps tied to Berkshire Hathaway debt significantly overstate underlying risks. Moody’s, which downgraded Berkshire Hathaway’s credit rating in April, makes some observations that seem rather obvious to anyone who has been following Berkshire’s financial condition in recent years. Michael Love, a credit analyst at Moody’s wrote:
Berkshire “has one of the best credit profiles among large financial companies,” he wrote. “We believe that investors should consider writing CDS protection on Berkshire at current levels.”
As the Bloomberg article points out, even with a decline in the cost of buying protection against a Berkshire default, credit default swaps remain at levels implying a much lower credit rating:
Credit-default swaps on Berkshire fell 31 percent to 180 basis points today from 260.7 basis points on June 23, CMA data show. They currently imply a rating of Baa3, seven steps below its long-term debt rating of Aa2, according to Moody’s.
It is not clear whether Moody’s comments regarding Berkshire credit default swaps being overpriced might imply that their analysts are also considering the reinstatement of Berkshire’s AAA rating. As I pointed out when Moody’s downgraded Berkshire in April, the analyst seemed to lack a solid grasp of the nature of Berkshire’s derivatives exposure. Given their fixation on the mark to market losses that appeared in the Q1 report, perhaps the mark to market gains in the Q2 report have alleviated some concerns.
As I pointed out last month in an article on Berkshire’s Q2 results, these mark to market gains and losses are not occasions for euphoria or despair, a fact that continues to be lost on the ratings agencies.
Disclosure: The author owns shares of Berkshire Hathaway. The author does not own shares of Moody’s but Berkshire Hathaway owns 17% of Moody’s stock, which makes it an indirect holding via Berkshire.