DBRS Confirms Ratings of Brookfield Asset Management Inc. at A (low)

DBRS Limited (DBRS) has today confirmed the long-term, short-term and preferred shares ratings of Brookfield Asset Management Inc. (BAM, Brookfield or the Company) and its subsidiaries at A (low), R-1 (low) and Pfd-2 (low), respectively. All trends are Stable. DBRS has concurrently discontinued the rating of Preferred Securities as they have been paid in full.

The confirmations reflect the following factors: (1) improved financial flexibility following the spin-off of Brookfield Business Partners in June 2016; (2) continued growth in funds from operations (FFO) and increasingly predictable Company-level cash flows driven by the growth of the asset management business, which is BAM’s largest cash flow generation segment; and (3) continued expansion of assets under management (AUM) and fee-bearing capital (FBC) through acquisitions and organic growth, which is largely supported by external funds from institutional partners and global investors. DBRS expects Brookfield to continue to generate an increasing proportion of its cash flows from asset management fees that are fixed or based primarily on the size of the committed investors’ capital and distributions from its flagship companies over the medium to long term.

Financial performance in 2016 improved from 2015 and remained solid for the 12 months ended March 31, 2017 (LTM March 2017), supported by financial results at its flagship partnerships as follows: Firstly, strong performance from asset management fees, particularly from stable base management fees, which had a 63% increase in 2016 FFO over 2015 as this segment benefits from continued growth in fee-based capital. Secondly, a modest increase in FFO generated by the Property segment, reflecting solid performance at all business lines (core office, core retail and opportunistic at Business Property Partners L.P. (BPY)). This segment benefited from continued improvement in occupancy and in-place rents for the year. Thirdly, increased FFO contribution from the Infrastructure segment, reflecting growth at its utilities, transport and energy operations. Cash flow from these business lines is relatively stable, reflecting either cost-of service or long-term tolling agreements. And finally, increased FFO contribution from the Private Equity segment, largely reflecting the improvement at Norbord Inc. (rated BB with a Stable trend by DBRS) due to strong housing markets in the United States and Ontario.

Strong performance from the above-mentioned operations was partially offset by: (1) weaker FFO contribution from the Renewable Power segment due to low power prices; however, substantial third-party contractual arrangements at Brookfield Renewable Partners significantly mitigated the negative impact of low power prices, and (2) modestly lower FFO contributions from the Residential Development segment largely reflecting difficult economic conditions in Brazil.

BAM’s financial metrics remained solidly supportive of the current ratings, improving further in 2016 as follows:
-- FFO-to-debt improved to 51.4% from 43.6% in 2015.
-- FFO interest coverage expanded to 10.6 times (x) from 8.63x in 2015. DBRS notes that this ratios has been partially supported by the low interest environment.
-- Net cash flow-to-corporate debt increased to 44.5% from 41.5% in 2015 (net cash flow is cash distributions from subsidiaries to BAM plus direct cash income and fees less corporate expenses).
-- Non-consolidated leverage increased from the 2015 level but remained relatively low at 16.6% at March 31. 2017.

The Stable trends reflect DBRS’s view that the improved financial metrics now place BAM more comfortably within the levels expected for its ratings. The expected levels are as follows: FFO-to-corporate debt to exceed 35% and FFO interest coverage of more than 5.5x. In addition, DBRS is of a view that the LTM March 2017 cash flow-to-corporate debt and non-consolidated capital structure are supportive of the current ratings. The ratings continue to reflect DBRS’s expectation that the Company’s business risk profiles will not materially deteriorate because of significant investments in higher-risk businesses, that cash distribution to BAM from its subsidiaries will remain at a similar proportion to their annual FFO and that Company-level liquidity will remain strong. The ratings could be under pressure if BAM’s ability to increase AUM and FBC weakens and/or its financial ratios decline to below the DBRS-expected levels.

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 Senior Unsecured Notes issued by Brookfield Finance LLC and Brookfield Finance Inc. are fully and unconditionally guaranteed by Brookfield Asset Management Inc.

The principal methodologies are Rating Entities in the Real Estate Industry, Rating Independent Power Producers, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities, Rating Companies in the Pipeline and Diversified Energy Industry, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.