DBRS Confirms Brookfield Asset Management at A (low), R-1 (low), Trend Stable

DBRS has today confirmed the ratings of Brookfield Asset Management Inc. (BAM or the Company) at A (low), R-1 (low) and Pfd-2 (low). The ratings pertain to BAM at the corporate level. The ratings remain on a Stable trend, notwithstanding weaker corporate-level financial metrics in 2011 because of increased corporate-level debt to finance the growing invested capital. DBRS recognizes that the financial metrics are now weak for the ratings and believes that there is currently minimal room for further deterioration without pressuring the ratings. If one of the following scenarios were to materialize, DBRS will review and base our rating decision on an assessment of the contributing causes, the Company’s remedial plan and other relevant circumstances. These scenarios are: (1) Material increase in the proportion of BAM’s invested capital in less-stable opportunistic investments and private equity, leading to debt increases. (2) Material deterioration or rating downgrade in one or more of the core businesses. (3) Inability to improve cash flow coverage metrics (which could include funds from operations (FFO)-to-debt and FFO fixed charge coverage) to their 2010 levels by the end of 2012.

The year 2011 was one of rather rapid growth in BAM’s assets under management (AUM), which expanded to US$152 billion from US$122 billion during 2011, while invested capital (excluding the intrinsic value of asset management) increased to US$31 billion from US$26 billion, largely as a result of investment and the merger of Prime Infrastructure with Brookfield Infrastructure Partners LP, the additional investments in General Growth Partners, and expansions at the operating companies in its core businesses. DBRS has identified BAM’s demonstrated track record in attracting and mobilizing investments from external investors (mainly pension funds and other institutional investors) as one of the Company’s strengths – one that is key to its strategy execution. External capital has increased by 56%, or US$44 billion, since 2007, despite the recession and financial market volatility in 2009, while the corresponding increase in BAM’s own invested capital was substantially lower at US$31 billion.

BAM has remained focused on its five areas of competency: renewable power, property investments, infrastructure, asset management services, and private equity. BAM has also participated in more opportunistic investments in ‘special situation’ or distressed assets through its own capital and managed funds. The investment-grade quality of BAM’s main core businesses, underpinned by regulated or contracted revenue, asset diversification and predictable operating costs, is, in our view, a key supporting factor for the ratings.

The timing and amount of cash flows from private equity, developments, and opportunistic financings, on the other hand, are less predictable as they depend largely on the investee companies’ ability to turn around their distressed operations and asset disposals. As such, we consider these cash flows to be of weaker quality than those from its core businesses. We expect BAM to maintain the proportion of invested capital in these opportunistic investments within the 20% to 25% range in order to remain at a level commensurate with the assigned ratings.

DBRS focuses on BAM’s corporate-level financial measures in our assessment of the Company’s credit strength and ratings. This is based on our assessment of BAM’s corporate structure and its stated policy of funding the operating needs of its investment companies, mainly with non-recourse, operating or project-level debt. In assessing BAM’s cash flow coverage and leverage metrics, we believe that these cash flows are remittable after the operating companies satisfy their own debt servicing, operating needs and capital expenditure, and comply with applicable distribution tests, and, as such, could be more volatile than their underlying operating cash flows, especially considering that the amount of this non-recourse debt is significant.

BAM’s corporate-level debt and issuance of preferred shares have increased in the past two years to partly finance its investments. In the meantime, operating cash flows from its investments recorded only modest growth. As a result, BAM’s corporate-level cash flow coverage metrics have weakened during the period, with FFO coverage-to-debt of 23% in 2011 (from 30% in 2010), FFO-to-interest of 4.5 times (x) (from 5.1x) and FFO-to-fixed charges (interests and preferred share dividend) of 3.1x (from 3.7x). We consider these 2011 levels weak for the ratings and expect improvement during 2012.

BAM’s corporate-level liquidity is strong, supported by corporate-level cash and available credit facilities of $2.4 billion as at December 31, 2011, and annual FFO after corporate expenses of about US$1.0 billion. Currently, there is no material debt repayment scheduled until 2014, when US$518 million comes due. The Company’s financial flexibility is further supported by its ability to access its external investor base and capital markets and to monetize part of its investments in listed vehicles, estimated to have a market value of US$17.9 billion (covering 3.8x the corporate-level debt of US$4.7 billion). While BAM’s liquidity should comfortably cover its corporate-level needs, DBRS notes that the Company remains largely dependent on external investors’ capital and equity issuances to support its growth.

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

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