DBRS Morningstar Comments on Brookfield Asset Management Inc’s Proposal to Distribute 25% of its Asset Management Business to Shareholders

DBRS Limited (DBRS Morningstar) notes that Brookfield Asset Management Inc. (BAM or the Company; rated A (low) with a Stable trend by DBRS Morningstar) announced that its asset management business (AMB) will be listed and 25% of the AMB (the Restructuring) will be distributed to shareholders.

BAM is a leading global alternative asset manager, with total assets under management (AUM) of approximately $720 billion and fee-bearing capital of approximately $379 billion. DBRS Morningstar notes that there will be no cash transactions and no incremental debt to be issued by BAM in connection with the Restructuring, which is expected to be completed by the end of 2022. The Restructuring will largely involve the following:

• Fee-related earnings, which include base management fee, incentive distribution, and transaction and advisory fees, as well as performance fees.
• Carried interest, which includes realized carried interest and unrealized carry interest.

All other segments: Real Estate, Renewable, Infrastructure, Private Equity, Residential Development and Corporate will not be part of the Restructuring.

According to DBRS Morningstar’s analysis, with a reduction of 25% in the FFO from the AMB, the Restructuring is expected to have a modestly negative impact on BAM’s credit metrics such as the FFO-to-debt and cash flow-to-debt ratios. However, DBRS Morningstar views the impact as manageable because BAM’s credit metrics are currently strong for the ratings. Moreover, the metrics will remain supported by growing fee-bearing capital and the incremental FFO from Real Estate as a result of last year’s acquisition of the 38% interest in Brookfield Property Partners LP that BAM did not already own. From a business risk profile perspective, the Restructuring is expected to only have a modestly negative impact on BAM’s risk profile as the relative importance of the asset management business, which is viewed as being of higher credit quality relative to BAM’s other business pillars, will decline somewhat. However, DBRS Morningstar notes that the other major business pillars (such as Real Estate, Renewable, Infrastructure, and Private Equity) continue to benefit from sound fundamentals, providing superior business diversification to BAM. Furthermore, the reduction in the AMB FFO only partially offset the significant increases in AUM and fee-bearing capital in recent years.

DBRS Morningstar believes if the Restructuring is implemented as currently planned, there will be no rating impact on BAM and its guaranteed subsidiaries. However, DBRS Morningstar could take a negative rating action if (1) the Company’s credit metrics weaken materially from the level as required by DBRS Morningstar on a sustained basis; or (2) its business risk profile post Restructuring deteriorates significantly. DBRS Morningstar currently considers these scenarios unlikely.

Please see DBRS Morningstar’s Brookfield Asset Management Inc. Rating Report dated July 19, 2021, for further references.

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.

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

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