NU Online News Service, Nov.5, 3:34 p.m.EST

Berkshire Hathaway and its insurance subsidiaries, includingGEICO, have been placed on Rating Watch Negative over its plans tobuy Burlington Northern Santa Fe railroad, Fitch Ratings said.

Berkshire announced Tuesday that it had entered into adefinitive agreement with Burlington Northern to acquire the 77percent of the railroad's shares it does not already own inexchange for cash or Berkshire shares.

Berkshire said it expects the acquisition, which requiresapproval by holders of two-thirds of Burlington Northernoutstanding shares and the Department of Justice, to close in thefirst quarter of 2010.

Berkshire's railroad purchase raises concerns, Fitch said, aboutBerkshire's asset profile and capitalization.

The rating firm said it views the acquisition, along withBerkshire's investments in utilities and energy and finance companysubsidiaries, "as increasingly shifting the company's asset profiletowards concentrated investments in operating subsidiaries that usemore financial leverage and often have greater sensitivity togeneral economic conditions than the company's long-held insuranceand holding-company equity oriented investments."

It said that historically both Berkshire's and its insurancesubsidiaries' very high ratings have benefited from the overallorganization's investments in the comparatively highly-ratedinsurance sector and from non-controlling equity investments theorganizations made in a wide variety of businesses that generatedsignificant capital growth.

These rating benefits, said Fitch, are coming under pressure atboth the holding company and insurance operating company levels, asan increasing proportion of Berkshire's assets consist of solid,but comparatively lower credit-quality and less-liquid assets.

Fitch also believes, it said, that the railroad acquisition islikely to result in a meaningful increase in Berkshire's financialleverage, especially on a tangible capital basis. The acquisitionwill be funded by $8 billion of debt financing and $8 billion ofinternal funds.

Fitch noted that, Berkshire is paying a premium of roughly $20billion over Burlington Northern's book value on June 30, and thefirm believes the transaction could materially increase the amountof goodwill on Berkshire's balance sheet.

It also pointed out that Burlington Northern has $10 billion ofoutstanding debt, and said while it believes that that this debt islikely to be funded by railroad operations, the agency views it asan incremental contingent call on Berkshire's cash flows andcapital.

The agency said it believes the acquisition is likely to closeas currently conceived by Berkshire and anticipates conductingfurther analysis of the transaction and its potential effects onBerkshire over the coming weeks. It expects to resolve its RatingWatch on Berkshire's and its insurance subsidiaries' ratings, priorto the transaction's close.

Fitch's additional analysis, it said, will focus on assessingBurlington Northern's credit-quality and its impact on Berkshire'scredit profile; evaluating the effect on the organization'sleverage ratios of the incremental debt and investmentconcentrations derived from the transaction and reviewing interestcoverage ratios generated by Burlington Northern and their effecton Berkshire's consolidated interest coverage ratios.

In addition to GEICO and General Reinsurance Corp. otherinsurance units of Berkshire include

General Star Indemnity Company; National ReinsuranceCorporation; General Star National Insurance Company; GenesisInsurance Company; Genesis Indemnity Insurance Co.; FairfieldInsurance Company; National Indemnity Company; Columbia InsuranceCompany; National Fire and Marine Insurance Company; NationalLiability and Fire Insurance Company; National Indemnity Company ofthe South; National Indemnity Company of Mid-America and WescoFinancial Insurance Company.