DBRS Comments on Brookfield’s Investment in General Growth Properties

DBRS notes that Brookfield Asset Management Inc. (Brookfield) has today announced its intention to invest in General Growth Properties, Inc. (GGP). Brookfield has reached an agreement in principle to invest approximately $2.625 billion in a recapitalization of GGP. Brookfield’s investment will be made through its $5 billion Real Estate Turnaround Consortium (the Consortium). Brookfield expects to hold between 25% and 30% of the investment (i.e., between $625 million and $750 million), with the balance syndicated to the Consortium partners and other institutional investors prior to funding. The plan requires approval of the Bankruptcy Court. Before approval, the court would also need to consider any competing bids.

Under the proposed plan, the Consortium will invest $2.5 billion for new GGP common stock and up to $125 million for General Growth Opportunities (GGO) common stock. As a result, the Consortium would own approximately 30% of GGP and be able to nominate three directors. (GGO is a new company that will own certain non-core assets, such as all Master Planned Communities, South Street Seaport, etc. GGO intends to raise $250 million through a rights offering, with Brookfield providing up to $125 million.)

Brookfield and the Consortium intend to hold the proposed investment rather than Brookfield Properties, which invests primarily in office properties. As noted in an earlier report, DBRS recognizes Brookfield’s strategy to make opportunistic investments in distressed assets, so long as it does not stress its balance sheet or liquidity. This investment appears to fit with the criteria Brookfield has set out previously.

Hence, DBRS views this plan as neutral to Brookfield’s ratings providing: (i) it enlists other co-investors to support and fund the plan, (ii) the cost of the investment remains at these levels, (iii) the remaining debt and any new debt at GGP is non-recourse to Brookfield and (iv) it maintains sufficient liquidity at the corporate level while completing the plan. At the end of Q3 2009, Brookfield had over $600 million in cash and financial assets on hand, as well as bank lines at the corporate level, plus access to ongoing cash flow and other forms of liquidity within the group.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Real Estate and Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.