DBRS Confirms Brookfield Asset Management at A (low) and R-1 (low)

DBRS has today confirmed the long and short-term ratings of Brookfield Asset Management Inc. (Brookfield or the Company) at A (low) and R-1 (low), with the Preferred Shares and Preferred Securities confirmed at Pfd-2 (low). The ratings remain on a Stable trend, notwithstanding a number of significant undertakings in 2010.

Brookfield grew opportunistically last year, investing in distressed situations including Babcock & Brown (becoming Prime Infrastructure) and General Growth Partners. Low interest rates have supported the recent investing program which could continue through 2011. It also expanded its third-party asset management business. At the end of 2010, total assets under management exceeded $121 billion, consolidated assets grew to $78 billion and the Company’s own core net invested capital grew to $26 billion. While some of the increase was due to the early adoption of IFRS accounting, most of it was driven by deploying more of both its own and co-investor capital. With its successful track record, the Company’s list of partners has grown considerably to the point where co-investors are a key source of growth capital. In fact, the Company’s excellent relationships with pension funds and other institutional investors is a key strength that allows it to manage its risk profile by sharing investing risks based on access to equity-like funding.

DBRS focuses on Brookfield’s unconsolidated financial statements (the rating applies to the corporate debt). Using these, DBRS reviews the cash in, cash out at the corporate level, as well as leverage at the corporate level. During 2010 cash flow and liquidity remained reasonable, as cash inflow exceeded cash outflow. Annually, cash flow remitted up to the corporate level before realized gains is expected to be over $1.4 billion, with about $700 million of cash outflow for corporate expenses, interest expense, dividends, etc., leaving over $700 million in free cash flow. The primary sources of cash inflow were from the power and real estate groups. The corporate leverage remains just under DBRS’s 30% limit for this rating category (under GAAP). As discussed below, these were key considerations in maintaining the ratings.

Other key rating factors include the high quality of the underlying portfolio and the potential liquidity it offers. DBRS notes the credit ratings of the main subsidiaries remain unchanged, particularly 50%-owned Brookfield Properties Corporation (BPC or Brookfield Properties; rated BBB (high)) and Brookfield Renewable Power Inc. (BRP; rated BBB (high)).

Over the last ten years, Brookfield’s investment portfolio has gone though a considerable evolution in size, scope and global diversity. Investments include: commercial properties, renewable power, infrastructure (timber and utilities), development (residential housing and land) and private equity (investing and lending). As well, the Company generates considerable income from cash and other financial assets and the fees from the management of third party assets. In 2010, these five operating segments saw increased cash flow, except the renewable power segment. This was due primarily to the low water levels in central Canada and lower prices for spot power. Brookfield’s power sales are approximately 83% contracted over the next two years and 17% at the spot price. In fact, much of the revenue of the five segments is under contract (about 60% to 65% of total cash flow), limiting the downside.

Overall, DBRS still remains concerned with Brookfield’s aggressive expansion program and the possible impact it may have on its overall risk profile. Brookfield’s investments normally include real, low risk assets that generate steady cash flow. If there was a shift towards more speculative investments intended for shorter hold periods, the ratings could come under pressure. DBRS notes that the financial packaging of Brookfield’s investments within its portfolio can be complex. The transparency for this and intercompany transactions can be a challenge at times.

DBRS notes that while Brookfield’s corporate liquidity and cash flow has been reasonable, it is not sufficient to be a primary funding source for large new investments. In fact, the current size of corporate debt and preferred shares is approaching the limits for the current rating category. Thus far, concerns that sizable transactions could negatively affect the Company’s credit ratings have been mitigated with the used of co-investor capital and non-recourse debt. Even so, DBRS notes that the non-recourse debt at the operating levels is significant and that it has first claim on the related cash flows. It also presents some group refinancing risk.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Parent/Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.