DBRS Confirms Ratings of Brookfield Asset Management Inc. at A (low), R-1 (low) and Pfd -2 (low) with Stable Trends

DBRS Limited (DBRS) confirmed all the ratings of Brookfield Asset Management Inc. (BAM or the Company) and its subsidiaries as listed below. All trends are Stable. The confirmations reflect a meaningful increase in low-risk, fee bearing capital (FBC) resulting in growing base management fees, stable business risk profiles at listed partnerships and private funds, solid financial performance in 2018 and Q1 2019 and solid metrics and liquidity at the corporate level, which, pro forma for the proposed acquisition of Oaktree Capital (Oaktree), are expected to remain strong over the medium term. The current ratings consider (1) the strength of the credit profile at its listed partnerships and private funds, (2) the structural subordination of BAM’s debt to the debt issued by its subsidiaries and property-specific debt, (3) the unlevered cash flow from base management fees and (4) the size and diversification of BAM’s investment portfolios, as well as the stability of funds from operations (FFO).

The significant growth in FBC supports the quality of the cash flow to BAM through increases in base management fees in the Asset Management segment, which is the largest FFO and cash flow contributor to BAM. This segment has no debt and accounted for approximately 40% of BAM’s segment FFO in 2018 (27% in 2015). The unlevered cash flow and the diversification of BAM’s operations significantly mitigate the structural subordination issue for BAM’s corporate debt. DBRS expects this segment to continue to grow and remain BAM’s largest cash flow contribution going forward. In April 2019, BAM announced the agreement to acquire 62% of Oaktree. The proposed Oaktree acquisition is expected to moderately increase cash flow to BAM, and the financing of Oaktree does not increase corporate debt materially (see DBRS press release dated March 14, 2019).

Most of BAM’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 2018. First, following a number of acquisitions and sales over the past 12 months, the Real Estate segment continues to benefit from high-quality asset locations with long-term leases, improvement in occupancy and in-place rents and good-quality tenants. Second, the Renewable Power segment benefits from long-term contracts, low-cost operations and operational expertise. Approximately 90% of total projected generation for 2019 and 2020 is under contract, significantly reducing the segment’s exposure to commodity price risk. DBRS notes that the uncontracted capacity in North America has incurred losses over the years due to low merchant power prices. However, these losses are insignificant in the context of BAM’s overall FFO. Finally, 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 cash flow to BAM in 2018 and are expected to remain the key cash flow contributors to BAM going forward. DBRS, notes, however, that strong performance from these segments is partially offset by poor performance in the Residential Development segment due to weak economic conditions in Brazil.

BAM’s credit metrics for the last 12 months ended March 31, 2019, remained solidly supportive of the current ratings as follows:

-- FFO-to-debt remained strong at 40.4% (35.5%, adjusted for debt treatment of preferred shares), above DBRS’s expectation of at least 30% on an adjusted basis.
-- Cash flow-to-interest coverage was solid at 8.79 times (x), consistent with DBRS’s expectation of above 5.0x.
-- Net cash flow-to-corporate debt was strong at 34.7% (30.4% adjusted for preferred shares), above DBRS’s expectation of around 30% (25% on an adjusted basis).
-- Non-consolidated leverage remained in line with DBRS’s expectation that the corporate debt-to-capital would be in the low 20% range on an adjusted basis.
-- Stronger ratios post March 31, 2019, following the reduction of CAD 600 million (USD 450 million) in corporate debt in Q2 2019.

The Stable trends reflect DBRS’s expectation that (1) BAM’s credit metrics will remain stable over the medium term, particularly following the Oaktree acquisition, which is expected to close in Q3 2019; (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) Company-level liquidity will remain strong to maintain flexibility in its financing plan. The ratings could be under pressure if the credit quality of BAM’s listed partnerships weakens significantly and/or its corporate credit metrics decline to below DBRS-expected levels on a sustained basis. A positive rating action may be taken if (1) BAM’s business risk profile improves significantly and (2) BAM’s non-consolidated credit metrics improve materially on a sustained basis.

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; 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.

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 under Related Documents or by contacting us at info@dbrs.com.

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.

For more information on this credit or on this industry, visit www.dbrs.com.

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