DBRS Confirms Ratings of Brookfield Asset Management Inc. at A (low), R-1 (low), Stable Trends

DBRS Limited (DBRS) confirmed the long-term, short-term and preferred shares ratings of Brookfield Asset Management Inc. (BAM, Brookfield or the Company) and certain of its subsidiaries at A (low), R-1 (low) and Pfd-2 (low), respectively. All trends are Stable (see the list below). The confirmations reflect a meaningful increase in low-risk, Fee Bearing Capital (FBC) resulting in growing base management fees, stable fundamental risk profile at listed partnerships and private funds, solid financial performance in 2017 and Q1 2018 and solid metrics and liquidity at the corporate level. The current ratings consider (1) BAM’s debt is structurally subordinated to the debt issued by its subsidiaries and property-specific debt and (2) relatively high leverage at BAM’s subsidiary level and project level, which is non-recourse to BAM.

The growth in FBC was the key driver for the recent increase in base management fees in the Asset Management segment, the largest Funds from Operations (FFO) and cash flow contributor to BAM. This segment accounted for approximately 40% of BAM’s segment FFO for the 12 months ended March 31, 2018 (LTM 2018; 24% in 2014). Cash flow from this segment is unlevered, significantly mitigating the issue of structural subordination for BAM creditors and solidly supporting its credit profile. DBRS expects this segment to continue to remain BAM’s largest contribution to FFO and cash flow going forward to reflect BAM’s ability to grow its FBC through acquisitions and organic growth. Most of Brookfield’s investments are through its listed partnerships and private funds, which have maintained relatively stable business risk profiles since DBRS’s last rating review in June 2017.

First, the Real Estate segment, following a number of acquisitions and sales over the past 12 months, continues to benefit from high quality asset locations with long-term leases, improvement in occupancy and in-place rents and good-quality tenants. These strong fundamentals resulted in stable core FFO and significant realized disposition gains in 2017 and Q1 2018. In March 2018, Brookfield Property Partners (BPY) announced the acquisition of all of the outstanding shares (other than those shares (34%) held by BPY and its affiliates) of GGP Inc. (GGP), a retail real estate company based in the United States. The proposed acquisition will be financed through a share exchange (approximately 60% of total consideration), subject to the proration based on cash consideration of $9.25 billion (approximately 40%). The cash portion is expected to be financed by asset sales at GGP (approximately 45%) and GGP obtaining term loans from the banks and institutional partners (55%). DBRS does not expect this financing to have a material impact on BAM’s non-consolidated leverage and would provide opportunity for BAM to generate higher base management fees.

Second, the Renewable Power segment benefits from long-term contracts, low-cost operations and operational expertise. Approximately 92% of total projected generation for 2018 and 2019 is under contract, significantly reducing the segment’s exposure to commodity price risk. DBRS notes that approximately 40% of these contracts are internal with BAM’s affiliates and a portion of the output is sold into the merchant power markets and resulted in losses over the past few years. However, these losses are insignificant in the context of BAM’s overall FFO.

Third, Infrastructure remains one of the lowest business risk segments with most FFO generated from regulated utilities, long-term contracted transportation and tolls. These three segments, together with the unlevered Asset Management segment, accounted for approximately 90% of LTM 2018 FFO. DBRS, however, notes that strong performance from these segments is partially offset by poor performance from the Private Equity segment (due to weak results and higher uncertainties from the construction services operations) and the Residential Development segment (due to weak economic conditions in Brazil).

BAM’s financial metrics for LTM 2018 remained solidly supportive of the current ratings as follows:

-- FFO-to-debt remained strong at 42.2%, above DBRS’s expectation of at least 35%.
-- Net cash flow-to-corporate debt remained strong at 35.6%, above DBRS’s expectation of at least 30%.
-- Non-consolidated leverage remained in line with DBRS’s expectation of the low 20% range.

The Stable trends reflect DBRS’s expectation that (1) these metrics will remain stable over the medium term; (2) the Company’s business risk profiles will not materially deteriorate because of potential investments or capital recycling from mature assets to higher-return, higher-risk assets; (3) cash distribution to BAM from its subsidiaries will remain strong to service its corporate debt; and (4) that Company-level liquidity will remain strong to maintain flexibility in its financing plan. The ratings could be under pressure if BAM’s ability to increase assets under management and FBC weakens and/or its financial ratios decline to below DBRS-expected levels on a sustained basis. A positive rating action may be taken if BAM’s business risk profile improves significantly and debt at the subsidiaries or property-specific debt is materially reduced while BAM’s non-consolidated credit metrics remain within the above-mentioned ranges.

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 principal methodologies are Rating Entities in the Real Estate Industry, Rating Companies in the Independent Power Producer Industry, 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.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.