DBRS Confirms Brookfield Asset Management’s A (low) Ratings, Changes Trend to Negative from Stable

DBRS has today confirmed all ratings of Brookfield Asset Management Inc. (BAM or the Company) but changed the trends to Negative from Stable. The ratings are BAM’s Issuer Rating at A (low), Commercial Paper rating at R-1 (low), Senior Notes and Debentures Rating at A (low) and Preferred Shares and Preferred Securities ratings, both at Pfd-2 (low). The trend change to Negative follows the downgrade of the Issuer Rating of BAM’s subsidiary, Brookfield Office Properties Inc. (BOP), to BBB from BBB (high), reflecting that BAM’s ratings are under pressure because of BOP’s weaker credit quality, as well as the sustained high debt level at BAM’s corporate level.

As noted in our press release dated October 18, 2012, DBRS recognizes that BAM’s overall credit profile has weakened within its current rating category in recent years because of fluctuating cash flows from its opportunistic investments and increased leverage at the corporate level. As a result, there remains minimal room for further deterioration. DBRS further indicated in October that BAM’s current ratings could come under pressure due to: (1) a material deterioration or rating downgrade in one or more of the core businesses (including BOP); (2) corporate-level financial metrics for 2012 falling short of our targets (funds from operation (FFO)-to-debt of 30% or higher and FFO interest coverage of 5.0 times (x)); or (3) a material increase in the proportion of BAM’s invested capital in less-stable opportunistic investments.

The downgrade of BOP’s rating reflects increased uncertainty due to material near-term maturing tenancy agreements, increased leverage and lower cash flow coverage metrics. As such, DBRS believes that the quality of cash flows remitted to BAM from this material subsidiary, which is available after BOP satisfies its own debt servicing and operating needs, is also weakened.

DBRS recognizes that BAM’s corporate-level cash flow metrics have improved in 2012 and are close to our previously stated expectations. For the full-year 2012, the Company’s FFO-to-debt was 28% (compared with 23% in 2011 and DBRS’s expectation of 30%) and FFO interest coverage was 4.9x (compared with 4.5x in 2011 and DBRS’s expectation of 5.0x). The shortfalls from our previously stated expectations also reflect the impact of continued difficult hydrology to operating cash flow in its renewable power segment and some delays in its asset disposal plan.

However, DBRS notes that, as was the case with BOP, the quality of BAM’s portfolio of operating assets has been affected in recent years by its respective debt-financed expansions at operating company levels (particularly in the retail property, renewable power and infrastructure segments). Although such expansions are generally earnings accretive, the increased leverage, weakened coverage metrics and, in some cases, higher business and project risks, have constrained the quality of cash flow from these companies, most of which are assessed to be compatible to rating levels of BBB or weaker.

DBRS believes that, to sustain its ratings at the A (low) level, BAM will need to improve the overall credit quality of its investments over time through increasing the proportion of investments with strong BBB or better credit quality and more conservative use of leverage at the operating-company level. With weaker quality of cash flow from BOP and increasing leverage (and therefore debt servicing requirements) in its key subsidiaries in recent years, DBRS now believes the cash flow metrics at BAM’s corporate level will need to be raised in order to maintain the necessary cushion for its ratings. Specifically, DBRS expects BAM to further improve its corporate-level FFO-to-debt toward 35% and FFO interest coverage toward 5.5x, and to maintain at these levels on a sustained basis. DBRS will review the progress during the course of 2013.

DBRS could consider a one-notch downgrade of BAM’s ratings if it becomes evident that the Company will be unable to meet any of the above expectations and to remedy the shortfall within an acceptable timeframe.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Holding Companies and Their Subsidiaries and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.