DBRS Limited (DBRS Morningstar) confirmed all ratings of Brookfield Asset Management Inc. (BAM or the Company) and its subsidiaries as listed below. All trends are Stable. The rating confirmations reflect the resilience of BAM’s fundamental operations at its subsidiaries, listed partnerships, and private funds and their ability to continue to distribute significant cash flow to BAM to service its corporate debt. In addition, the confirmations also incorporate BAM's plan to distribute a 25% interest of its asset management business to its shareholders (the Distribution) by the beginning of 2023.
The Asset Management segment (consisting of fee-related earnings and realized carried interest) is one of BAM's six core business segments and is the largest funds from operations (FFO) contributing segment to BAM. The Asset Management segment accounted for approximately 53% of BAM's FFO in 2021. The Distribution will not involve the other core segments of Real Estate, Renewable, Infrastructure, Private Equity, and Corporate Credit. In connection with the Distribution, there will be no cash transactions and no incremental debt to be issued by BAM. The Distribution is expected to have a modestly negative impact on BAM’s business risk profile and credit metrics, which DBRS Morningstar views as manageable (Please see DBRS Morningstar’s press release on the Distribution titled “DBRS Morningstar Comments on Brookfield Asset Management Inc’s Proposal to Distribute 25% of its Asset Management Business to Shareholders”, published May 16, 2022 for further references). BAM’s credit metrics are currently strong and are expected to improve further in 2022. The expectation of strong credit metrics for 2022 is supported by growing fee-bearing capital (FBC) and assets under management (AUM) as well as the incremental FFO from Real Estate following BAM's acquisition of an additional 38% ownership in Brookfield Property Partners, LP (BPY) in July 2021 without additional debt at BAM or at the asset levels.
DBRS Morningstar notes that the growth in AUM and FBC supports the quality of the cash flow to BAM through increases in FFO from the Asset Management segment in 2021 and expected in 2022. This segment has no debt and is forecast to account for approximately 36% of BAM’s segment FFO in 2023 (35% 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 the Asset Management segment to continue to grow and to remain BAM’s largest cash flow contributor despite the Distribution. DBRS Morningstar also expects that the other major business segments will continue to benefit from sound fundamentals, providing superior business diversification to BAM.
In the long term, DBRS Morningstar expects all major segments to maintain their solid business profiles. First, DBRS Morningstar expects that the Real Estate segment, although facing significant headwinds with respect to high debt leverage at the asset levels, rising interest rates, and potential global economic recession, will continue to recover from the pandemic and benefit from high-quality assets and premier locations with long-term leases, improvement in occupancy and in-place rents, and good-quality tenants. Cash flow from this segment post 2021 will benefit from BAM’s incremental 38% ownership of BPY. Second, the Renewable Power segment benefits from long-term contracts, low-cost operations, and operational expertise. Approximately 90% of the total projected power generation for 2022 is under contract, significantly reducing the segment’s exposure to commodity price risk and market downturns. DBRS Morningstar notes that the uncontracted power generation capacity in North America has incurred losses over the years because of low merchant power prices. However, these losses have been 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.
DBRS Morningstar expects BAM to remain resilient in coping with rising interest rates and inflation as well as potential global economic weakness in the medium term. With respect to rising interest rates, BAM's corporate debt maturity is well spread. Refinancing risk is low over the next few years as there are no corporate debt maturities until March 2024. DBRS Morningstar expects higher interest costs on BAM bonds to be issued in the short term but the refinancing risk to remain manageable, reflecting BAM's strong credit profile. In terms of rising inflation, BAM has the ability to adjust most of its revenues through inflation-adjusted contracts or its cost-of-service businesses, with only approximately 30% to 35% of operating costs likely to be negatively affected by inflation. DBRS Morningstar is of the view that BAM's ability to cope with inflation will likely remain solid.
BAM’s financial resiliency in coping with potential global economic weakness related to China's lockdown and the Russia-Ukraine war will remain solid without any material impact in the short to medium term although rising interest rates present a significant challenge for highly leveraged sectors and debt refinancing. This 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 approximately $4.11 billion of cash on hand and financial assets, and $2.18 billion of available credit facilities at March 31, 2022, and had no long-term debt due until March 2024. In addition, BAM’s credit strength is further supported by growing FBC, which had increased to approximately $379 billion at March 31, 2022, from $150 billion at March 31, 2019. This increase resulted in growing base management fees and other fee-related earnings for BAM. As a result, BAM generated solid FFO and maintained strong credit metrics in 2021 and Q1 2022. For the last 12 months ended March 31, 2022 (LTM March 2022), 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.
In light of the challenges presented by rising interest rates, high inflation, and economic uncertainties, DBRS Morningstar believes that BAM’s 2022 and 2023 credit metrics (especially in the Real Estate segment) will be somewhat affected. However, despite these challenges, DBRS Morningstar expects (1) BAM’s credit metrics will continue to meet DBRS Morningstar’s requirements in 2022 and after the Distribution in 2023, supported in part by stronger FFO and incremental cash flow contributions from the Real Estate segment and the strong Asset Management segment as well as significant additional investments in the Private Equity segment; (2) the Company’s business risk profiles will not materially deteriorate because of the Distribution; (3) cash distributions to BAM from its subsidiaries and listed partnerships will remain strong, supported by strong fundamentals at the asset levels; and (4) Corporate core liquidity will remain strong. The ratings could be under pressure if the credit quality of BAM’s subsidiaries and listed partnerships weakens significantly and/or its corporate credit metrics decline below DBRS Morningstar-expected levels on a sustained basis. A positive rating action is not likely in the medium term, given the current economic conditions and the planned Distribution.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.
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/396929.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563), Rating Companies in the Independent Power Producer Industry (May 18, 2022; https://www.dbrsmorningstar.com/research/396971), Rating Companies in the Pipeline and Midstream Energy Industry (November 3, 2021; https://www.dbrsmorningstar.com/research/387443), Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Commercial Paper Liquidity
Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), 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 ( March 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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 firstname.lastname@example.org.
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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