DBRS Morningstar Confirms Ratings of Brookfield Asset Management Inc. and Its Subsidiaries at A (low), R-1 (low), Pfd -2 (low), and BBB with Stable TrendsIndustrials, Real Estate
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 affiliates and private funds and their ability to continue to distribute significant cash flow to BAM to service its corporate debt. Except for its Real Estate segment, BAM’s financial and operational performance has been resilient in coping with the Coronavirus Disease (COVID-19) pandemic.
DBRS Morningstar notes that the negative impact of the pandemic on the Real Estate segment in 2020 and Q1 2021 was significant. This segment’s funds from operations (FFO) were materially reduced in 2020 and remained weak in Q1 2021. This negative impact was a result of mall closings, retail bankruptcies, co-tenant claims, rent rebatements, and low occupancy rates. In 2020, Real Estate’s segmented FFO (before realized disposition gains) decreased to approximately $483 million from $781 million in 2019. In Q1 2021, the segmented FFO (before realized disposition gains) declined to $85 million from $192 million in Q1 2020. On March 29, 2021, DBRS Morningstar downgraded the ratings on Brookfield Property Partners L.P. (BPY) to BBB (low) from BBB and changed the trends to Stable from Negative. Despite the impact of the Real Estate segment, BAM’s overall financial performance in 2020 increased modestly from 2019 and remained solid in Q1 2021.
DBRS Morningstar notes that BAM’s financial resiliency is supported by its well-diversified businesses, long-term contracts in the Renewable Power segment, long-term contracts and regulated assets in the Infrastructure segment, strong market position and high asset quality in the Real Estate segment, significant flexibility in the Private Equity segment, and its strong liquidity. BAM had more than $6.23 billion of cash on hand and financial assets, and $2.52 billion of available credit facilities at March 31, 2021, and had no long-term debt due until March 2024. In addition, BAM’s credit strength is further supported by growing assets under management (AUM) and fee-bearing capital (FBC). AUM is currently at approximately $609 billion and FBC increased to approximately $319 billion at March 31, 2021, from $150 million at the end of March 2019. This increase resulted in growing base management fees (BMFs) and other fee-related earnings for BAM. As a result, despite the impact of the economic shutdowns, BAM generated solid FFO and maintained strong credit metrics in 2020 and Q1 2021. For the last 12 months ended March 31, 2021 (LTM March 2021), BAM was able to maintain FFO-to-debt and cash flow-to-debt ratios well above DBRS Morningstar’s required level for the A (low) rating category. BAM’s corporate debt in the capital structure remained in the low 20% range.
BAM’s credit metrics for the LTM March 2021 were as follows:
-- FFO-to-debt remained solid at 36.2% (adjusted for debt treatment of preferred shares), above DBRS Morningstar’s expectation of at least 30% on an adjusted basis.
-- Net cash flow-to-corporate debt was strong at approximately 34.3%, above DBRS Morningstar’s expectation of around 25% on an adjusted basis.
-- Nonconsolidated leverage remained in line with DBRS Morningstar’s expectation that corporate debt-to-capital would be in the low 20% range on an adjusted basis.
-- Cash flow-to-interest coverage was solid at 9.16 times (x), consistent with DBRS Morningstar’s expectation of above 5.0x.
DBRS Morningstar expects that the worst of the economic fallout has already occurred and that the Real Estate segment should see a recovery in FFO as the economy gradually normalizes as well as improvement in cash rent collections, a reduction of bad debts, and higher occupancy rates driven by (1) fewer bankruptcies, (2) re-leasing to well-positioned tenants, (3) increasing short-term revenues, and (4) improving travel demand. In addition, FFO and dividends from the Real Estate segment to BAM should increase modestly in 2021 and significantly in 2022 and thereafter. This expected increase reflects the fact that BAM will increase its ownership of BPY to 100% from 62% (57% fully diluted) currently and take this entity private. On April 1, 2021, BAM and BPY announced that they reached an agreement for BAM to acquire all publicly outstanding shares of BPY. The acquisition is expected to close in Q3 2021. This transaction may be cash or BAM’s Class A shares. Maximum cash consideration is 50% of total value of the BPY units, which would be approximately $3.27 billion. DBRS Morningstar believes that BAM has sufficient funds to complete the transaction without having to issue any additional debt at the corporate level. This acquisition should improve cash distributions to BAM from BPY.
DBRS Morningstar notes that the growth in AUM and FBC supports the quality of the cash flow to BAM through increases in BMFs in the Asset Management segment, which is BAM’s largest FFO and cash flow contributor. This segment has no debt and, including financial assets, accounted for approximately 50% of BAM’s segment FFO in 2020 (37% in 2017). This unleveraged cash flow, together with BAM’s well-diversified operations and large size, significantly mitigates the structural subordination issue for BAM’s corporate debt. DBRS Morningstar expects this segment to continue to grow and to remain BAM’s largest cash flow contributor.
In the long term, DBRS Morningstar expects all major segments to maintain their solid business profiles. First, DBRS Morningstar expects the Real Estate segment to gradually recover and benefit from high-quality assets and premier 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 85% of total projected power generation for 2021 is under contract, significantly reducing the segment’s exposure to commodity price risk and the impact of the ongoing pandemic. DBRS Morningstar notes that the uncontracted power generation capacity in North America has incurred losses over the years as a result of low merchant power prices. However, these losses have reduced over the years and are now insignificant in the context of BAM’s overall FFO. Finally, Infrastructure remains one of the lowest business risk segments, with a majority of FFO generated from regulated utilities, long-term contracted transportation, and tolls.
The Stable trends reflect DBRS Morningstar’s expectation that (1) BAM’s credit metrics will continue to meet DBRS Morningstar’s requirements over the medium term, supported in part by a stronger FFO and cash flow contribution from the Real Estate and Asset Management segments; (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. The ratings could be under pressure if the credit quality of BAM’s listed affiliates 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 nonconsolidated credit metrics and consolidated credit metrics improve materially on a sustained basis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166), Rating Companies in the Pipeline and Diversified Energy Industry (November 19, 2020; https://www.dbrsmorningstar.com/research/370267), Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (October 27, 2020; https://www.dbrsmorningstar.com/research/368939), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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- Rating Companies in the Pipeline and Diversified Energy Industry (Archived) / November 19, 2020
- Rating Entities in the Real Estate Industry (Archived) / April 23, 2021
- Rating Companies in the Independent Power Producer Industry (Archived) / May 10, 2021
- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (Archived) / March 9, 2021
- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary (Archived) / November 2, 2020
- Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (Archived) / October 27, 2020
- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (Archived) / November 2, 2020
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (Archived) / February 3, 2021
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