February 26, 2008 / 7:26 PM / 12 years ago

Buffett's new insurer deals to get "AAA" - S&P

NEW YORK (Reuters) - Standard & Poor’s said on Tuesday it stands ready to begin assigning the top “AAA” rating to transactions insured by a new unit of Warren Buffett’s Berkshire Hathaway Inc (BRKa.N).

Berkshire’s new insurance arm is one of the few bond insurers that can offer borrowers and investors an unblemished top “AAA” rating, and market participants have been eagerly waiting to see how rapidly it will expand into munis.

One of the new businesses Berkshire Hathaway is winning is from tender option bond trusts, some of which are eager to replace troubled insurers, Jeffrey Previdi, a Standard & Poor’s analyst, told Reuters.

These leveraged trusts earn high returns by selling lower-yielding floating-rate paper to money market funds and investing the proceeds in higher-yielding long-term munis, which are often insured.

Money market funds fear that these tender option bonds will not be eligible for their portfolios if bond insurers are downgraded, so trusts are looking for solutions, including solid insurers.

The new insurer, Berkshire Hathaway Assurance Corp., only started insuring municipal bonds in January. Moody’s Investors Service on Friday said it has rated 120 secondary market muni bond transactions backed by Berkshire in the last two weeks.

Berkshire so far has not insured any bonds in the primary market, but that could change, Damien Magarelli, Standard & Poor’s analyst, told Reuters.

“It’s a very active situation. There are a lot of potentials out there,” Magarelli said, adding the agency has not yet rated any Berkshire-insured transactions.

The new insurer is not rated. The top rating on the deals it guarantees is justified by “significant contractual commitments including a contingent payment insurance policy and a financial enhancement letter from NICO,” Standard & Poor’s said in a statement.

The rating agency also said in a statement that top shelf ratings of Berkshire Hathaway and its subsidiary National Indemnity Co. (NICO) will not be affected by the new bond insurance business.

Reporting by Anastasija Johnson and Joan Gralla; Editing by James Dalgleish

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