DBRS Comments on Brookfield Asset Management Inc.’s Acquisition of 62% of Oaktree Capital Group, LLC

DBRS Limited (DBRS) notes that Brookfield Asset Management Inc. (BAM or the Company; rated A (low) with a Stable trend by DBRS) and Oaktree Capital Group, LLC (Oaktree Capital) have entered into an acquisition agreement whereby BAM will acquire approximately 62% of the Oaktree Capital business (the Acquisition). DBRS does not expect the Acquisition to have a material impact on BAM’s credit profile.

Under the Acquisition agreement, BAM will acquire all outstanding Oaktree Capital Class A units for either $49.00 in cash or 1.0770 Class A shares of BAM per unit. The Oaktree Capital Class A unitholders will have the option to receive cash or BAM’s Class A shares, subject to proration such that the total consideration to be paid by BAM will consist of 50% in cash and 50% in BAM shares.

The total consideration of the Acquisition is approximately $4.7 billion. The Acquisition is subject to the approval of Oaktree Capital unitholders, representing at least a majority of the voting interests of Oaktree Capital and other customary closing conditions, including certain regulatory approvals. BAM’s board of directors has unanimously approved the Acquisition. Under the Acquisition agreement, commencing 2022, former employee unitholders and Oaktree Capital’s founders, senior management and current employees will have the option to sell their remaining Oaktree Capital units to BAM over time pursuant to a liquidity schedule agreement and approach to valuing such units at the time of liquidation. Based on this liquidity schedule agreement, BAM could own 100% of Oaktree Capital in 2029 at the earliest.

Oaktree Capital is a Los Angeles-based global asset management firm, specializing in alternative investments with a large and relatively loyal institutional client base. Oaktree Capital has offices in 18 cities across 13 countries, of which the largest offices are in Los Angeles, London, New York and Hong Kong. Oaktree Capital manages assets on behalf of many of the most significant institutional investors in the world.

As of the end of 2018, Oaktree Capital’s assets under management (AUM) was approximately $120 billion. The areas of investments include distressed debt, high yield bonds, senior loans, private debt and private equity, convertible securities, multi-strategy credit and emerging market debt. At as December 31, 2018, Oaktree Capital had approximately $745 million (net of deferred financing fees) in corporate debt and corporate cash and equivalents were approximately $1.0 billion.

The Acquisition is expected to have a modestly positive impact on BAM’s business risk profile, reflecting the following factors: (1) the Oaktree Capital acquisition will result in an increase in BAM’s AUM to approximately $475 billion from $355 billion at the end of 2018; (2) the Acquisition will increase cash flow from low-risk, growing fees on fee-bearing-capital; (3) the Acquisition will broaden BAM’s product offerings, product diversification and client-base diversification; and (4) Oaktree Capital has strong credit quality in the “A” range, as indicated by other rating agencies.

FINANCING PLAN
BAM intends to finance the total consideration price through 50% common equity issuance and 50% cash. With respect to the cash financing part, DBRS does not expect there will be any material issues for BAM. At the end of 2018, BAM had approximately $2.3 billion in cash and cash equivalents and approximately $1.9 billion in undrawn credit facilities. In addition, BAM expects to receive a significant amount of cash flow from operations between now and the closing date. Further, BAM has a portfolio of approximately $5 billion in financial assets. In the event that debt is issued to finance part of the Acquisition, BAM could draw on its credit facilities, but the amount is expected to be modest. DBRS believes that BAM’s 2018 credit metrics were solid for the current ratings and DBRS expect them to stay well within DBRS’s requirements for the A (low) rating range following the closing of the Acquisition (funds from operations (FFO)/corporate debt of 35% and cash flow/corporate debt of 30%). As such, based on the total Acquisition consideration and the financing plan as currently proposed by the Company, DBRS does not expect the Acquisition to have any material impact on its credit profile.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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 Industry, 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 & Criteria.

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