DBRS Confirms Brookfield Asset Management Inc.

DBRS has today confirmed the ratings of Brookfield Asset Management Inc. (BAM or the Company). The ratings pertain to BAM at the corporate level and remain on a Negative trend since the last trend change on March 5, 2013. The trend change followed the downgrade of the Issuer Rating of BAM’s subsidiary, Brookfield Office Properties Inc. (BOP), to BBB from BBB (high) and reflects 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. 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 satisfied its own debt servicing and operating needs, is also weakened.

DBRS notes that the quality of BAM’s portfolio of operating assets has been affected in recent years by their respective debt-financed expansions at operating company levels (particularly in 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. While DBRS considers the benefits of asset diversity and strong liquidity in arriving at BAM’s current A (low) rating level, the weaker credit quality of its investments and increased corporate-level leverage have weakened the ground for such ratings differential.

BAM’s corporate-level cash flow metrics for the full-year 2012 were close to the previously set targets for the ratings. Funds from operations (FFO)-to-total debt in 2012 was 28% compared to 30% in 2010 (23% and 26%, respectively, after adjusting in accordance with DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), published on November 5, 2012) while FFO interest coverage was 4.9x in 2012 compared to 5.1x in 2010 (4.4x and 5.0x, respectively, after adjusting for the same).

As consistent with the Negative trend, BAM will be challenged to improve the overall 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 also believes that the cash flow metrics at BAM’s corporate level will need to be raised in order to maintain the necessary cushion for the ratings. Specifically, DBRS expects BAM to further improve its corporate-level FFO-to-debt toward 35% (or about 30% on an adjusted basis) and FFO interest coverage toward 5.5x (or about 5.0x on an adjusted basis), and to maintain at these levels on a sustained basis.

DBRS will monitor the progress during the course of 2013 and 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:
All figures are in U.S. dollars unless otherwise noted.

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) (November 2012), which can be found on our website under Methodologies