DBRS Confirms Brookfield Investments at Pfd-2 (low), Stable Trend

DBRS has today confirmed the rating of Pfd-2 (low) with a Stable trend for the Senior Preferred Shares of Brookfield Investments Corporation (Brookfield Investments or the Company). Despite disappointing financial results in 2009 and Q1 2010, Brookfield Investments continues to have sufficient asset coverage and dividend coverage to support the Pfd-2 (low) rating.

In Q1 2010, the Company’s earnings were impacted by continued weakness in the North American forest products sector given its Norbord investments and its other forest products investments held through Fraser Papers Inc. (which was written off in late 2009). Earnings were also impacted by a strengthening U.S dollar relative to the British pound during Q1 2010. DBRS notes, however, that the overall asset coverage (based on market values) for the Senior Preferred Shares improved modestly to 11.55 times as at Q1 2010 from 8.26 times in 2009 with recovering investment values, particularly the Company’s investment in Brookfield Properties.

The major changes to the portfolio holdings over the past couple of years include (1) the transfer of the Company’s indirect 15% interest in The Canary Wharf Group (CWG) to Brookfield Europe L.P. (BELP). In exchange, the Company received a limited partnership interest of approximately 42% in BELP, representing a market value of $588 million and cash proceeds in the amount of $196 million. (2) The Company increased its ownership interest in Brookfield Properties to 11% from 5% through the acquisition of 36.8 million common shares for approximately $350 million or $9.50 per share. To fund this acquisition, the Company mainly utilized on hand liquidity, including cash balances provided by the BELP acquisition.

As a result of these transactions and recovering market values, the Company’s exposure to real estate investments has increased to a current 86.4% from 75.2% in 2008. In addition, Brookfield Properties now represents 49.9% of the Company’s investment portfolio, up from 19.1% in 2008, which should continue to support overall market values and provide stable dividends going forward.

Looking ahead, DBRS expects asset coverage for the Senior Preferred Shares of 11.55 times (based on public share values as at March 23, 2010) and Senior Preferred dividend coverage of 2.07 times to recover, given the quality of the underlying investments. DBRS also expects that the Company will focus investments in stable, income producing assets such as preferred shares or common shares in real estate, power and other income-producing assets

The current rating is also supported by the following: (1) Brookfield Investments’ senior debt not exceeding 10% of the market value of Brookfield Investments’ portfolio; (2) No dividends being paid on the Brookfield Investments common shares unless, after giving effect to such dividend, the asset coverage for the Brookfield Investments Senior Preferred Shares would be at least three times. Excess cash flows beyond the Senior Preferred Shares are available to Brookfield Investments as sole holder of the Junior Preferred Shares and as sole common shareholder. The Junior Preferred Shares rank subordinate to the Senior Preferred Shares with respect to the payment of dividends and the Senior Preferred Shares are entitled to receive quarterly fixed, non-cumulative dividends equal to $0.31 per share.

The challenges to the rating include: (a) 42.7% of the value of the underlying shares is unlisted and may be illiquid. Upon retraction by the holder, the principal amount of Senior Preferred Shares may be repaid by liquidating the assets, which may have an impact on the realized value of Portfolio Shares; (b) there are no restrictions on the contents of the underlying portfolio and volatile market conditions could cause significant reductions in the net asset value of the Portfolio Shares (especially common shares).

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

The applicable methodology is Rating Real Estate which can be found on our website under Methodologies.

This is a Corporate rating.