DBRS Limited (DBRS Morningstar) 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 the resilience of BAM’s fundamental operations at its listed partnerships and private funds and their ability to continue distributing significant cash flow to BAM to service its corporate debt, despite the ongoing Coronavirus Disease (COVID-19) pandemic. As at March 31, 2020, BAM’s low-risk, fee-bearing capital (FBC) increased to approximately $264 billion from $150 million at the end of March 2019. This increase resulted in growing base management fees, which represent the strongest unleveraged cash flow to BAM from the Asset Management segment. DBRS Morningstar notes that, at the time of the last quarterly reporting, the coronavirus pandemic had had only a modest impact on BAM’s credit metrics and has been significantly mitigated by BAM’s diversification, high quality of assets in the Real Estate segment, long-term contracts in the Renewable Power segment, and long-term contracts and regulated assets in the Infrastructure segment. For the last 12 months ended March 31, 2020 (LTM 2020), BAM was able to maintain its funds from operations (FFO)-to-debt and cash flow-to-debt ratios well above DBRS Morningstar’s required level for the A (low) rating. BAM’s corporate debt in the capital structure remained low at around 20%. BAM’s core liquidity position was strong with approximately $4.5 billion in cash and available credit facilities at March 31, 2020, and with no long-term debt due until 2023.
BAM’s credit metrics for LTM 2020 remained solidly supportive of the current ratings as follows:
-- FFO-to-debt remained strong at 45% (approximately 39%, adjusted for debt treatment of preferred shares), above DBRS Morningstar’s expectation of at least 35%.
-- Net cash flow-to-corporate debt was strong at approximately 41% (approximately 36% adjusted for preferred shares), above DBRS Morningstar’s expectation of around 30% (25% on an adjusted basis).
-- Non-consolidated leverage remained in line with DBRS Morningstar’s expectation that the corporate debt-to-capital would be in the low 20% range on an adjusted basis.
-- Cash flow-to-interest coverage was solid at 9.53 times (x), consistent with DBRS Morningstar’s expectation of above 5.0x.
DBRS Morningstar expects a significant decline in FFO this year (excluding Oaktree Capital) as a result of the impact of weaker macro-economic environments, including government restrictions, real estate retail business weakening, and travel and transportation restrictions. However, this expected impact will be partially offset by (1) a full year of FFO contributions from a 61% interest in Oaktree (acquired in September 2019), (2) incremental FFO from a larger FBC base, and (3) stable cash flow from Renewable Power, regulated utilities, and pipeline operations. In addition, BAM has maintained good financial flexibility and strong ability to attract funds from institutional partners. DBRS Morningstar expects BAM’s currently-strong credit metrics to weaken materially but, even under a relatively harsh scenario, they are projected to continue to meet the required levels in 2020 despite the ongoing pandemic. Provided the impact of the pandemic continues to dissipate and the macro-economic outlooks for the major economies materialize, metrics should rebound meaningfully in 2021, restoring some flexibility in credit profile.
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 45% of BAM’s segment FFO in 2019 (27% in 2015). The unleveraged cash flow and the diversification of BAM’s operations significantly mitigate the structural subordination issue for BAM’s corporate debt. DBRS Morningstar expects this segment to continue to grow and remain BAM’s largest cash flow contribution. Following the acquisition of a 61% interest in Oaktree, which has improved BAM’s client base and diversification, DBRS Morningstar estimates that between $220 million and $250 million will be added to BAM’s 2020 FFO.
In the long term, DBRS Morningstar expects all major segments to maintain their solid business profile. Although the trend on the ratings of Brookfield Property Partners LP (BPY) was recently changed from Stable to Negative as a result of weaker-than-expected key financial risk metrics combined with material deterioration in the outlook and heightened uncertainty with respect to the Partnership’s ability to deleverage the balance sheet through its capital recycling initiatives, DBRS Morningstar continues to expect the Real Estate segment 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 95% of total projected power generation for 2020 is under contract, significantly reducing the segment’s exposure to commodity price risk and the coronavirus pandemic. DBRS Morningstar notes that the uncontracted power generation 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 unleveraged Asset Management segment, accounted for over 90% of cash flow to BAM in 2019 and are expected to remain the key cash flow contributors to BAM.
The Stable trends reflect DBRS Morningstar’s expectation that (1) BAM’s credit metrics will continue to meet our requirements over the medium term, despite the potential impact of the pandemic, supported, in part, by a full year contribution from Oaktree; (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 distributions to BAM from its subsidiaries will remain strong; and (4) Corporate core 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 Morningstar-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.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020); Rating Companies in the Independent Power Producer Industry (May 19, 2020); Rating Companies in the Pipeline and Diversified Energy Industry (November 26, 2019); Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 16, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020); and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020), which can be found dbrsmorningstar.com under Methodologies.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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