(The following statement was released by the rating agency)
NEW YORK, September 15 (Fitch) Fitch Ratings has assigned a rating of 'BBB-' to
the reopening of Brookfield Asset Management Inc.'s (TSX: BAM.A, the company)
4.82% senior unsecured notes due 2026. The new senior unsecured notes will be
issued in an amount of C$350 million, after the original issuance of C$500
million under the 4.82% 2026 notes program. Fitch considers that the additional
notes do not materially alter the risk profile of the issuer or of the
outstanding debt previously issued under the program.
The company intends to use the net proceeds from the sale of the notes for
general corporate purposes, and will temporarily be used to reduce short-term
borrowings.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's 'BBB-' Issuer Default Rating (IDR) for BAM reflects the application of
Fitch's 'Rating Investment Holding Companies' criteria, in particular the
quality and diversification of dividend flows from investees.
Dividend Subordination, Limited Diversity and Weak Credit Quality
Almost 40% of BAM's 2014 dividends were received from Brookfield Property
Partners (BPY), an entity that Fitch views as having a below investment-grade
credit profile. BAM receives over $1 billion of dividends from listed investees;
however, these dividends are after any corporate-level and project-specific debt
at the investee level. Thus, there is subordination to investee cash flows in
the organizational structure, and the weighted-average credit quality of the
dividend flow from analyzed investees is considered below investment-grade.
Fitch estimates that over 75% of BAM's 2014 deconsolidated recurring cash flows
were derived from investee dividends.
The remainder of BAM's recurring holding company-level cash flows are from its
asset management business. BAM receives asset management base fees, general
partner fees, incentive distributions, and performance (carry) fees. Fitch
included in recurring fee streams the base fees, but excluded other fees due to
their potentially being non-recurring or volatile. Fitch considers the recurring
nature of the base fees to be strong, given their contractual nature and the
expected growth in assets under management, which were approximately $218
billion as of June 30, 2015.
Good Dividend Coverage of Fixed Charges
Distributions and fees, net of fee-related expenses and corporate-level
expenses, provide good coverage of interest costs and fixed charges of BAM's
outstanding parent-level corporate obligations. Coverage was 3.5x and 2.7x for
the years ended Dec. 31, 2014 and 2013, respectively, and Fitch expects coverage
to improve to the high-3.0x range over the next two years.
Strong Financial Flexibility and Strong Liquidity
The holding company structure, with BAM's largest investments held in multiple
majority-owned publicly-listed companies, enhances BAM's financial flexibility
in managing the capital structures of its operating subsidiaries.
The holding company structure also protects BAM from having any recourse
indebtedness of its investees. Other than support of $1.8 billion of preferred
stock issued by BPY, parental guarantees or other contingent supports are
limited. Additionally, there are no cross default provisions between
subsidiaries or between the parent and subsidiaries.
BAM has a liquidity coverage ratio exceeding 2.5x, indicative of strong
liquidity. The good liquidity is driven by limited debt maturities over the next
2.5 years, combined with over $1.2b available under the company's unsecured
revolving credit facility.
Significant Control over Subsidiary Dividends
BAM's meaningful ownership and board representation for its subsidiaries likely
enables it to influence the dividend distribution policies, such that it can
have some control over cash flows available to meet corporate-level debt
service.
Stable Dividends for BEP & BIP; BPY Less Certain
BPY is a relatively new company and its dividend track record remains unproven,
having paid only six quarterly dividends since fourth-quarter 2013 (4Q13). In
addition, BPY's high leverage increases the risk of a dividend reduction in the
event of a downturn in commercial real estate fundamentals. Brookfield Renewable
Energy Partners' (BEP) dividend has been stable since 1999 inception with no
declines, and slight increases every few years. Brookfield Infrastructure
Partners' (BIP) dividend since 2008 inception has been stable and growing, with
no declines.
High Leverage on a Debt/Corporate Cash Flow Basis
BAM's leverage was 5.2x as of Dec. 31, 2014. This ratio is up from 4.5x as of
Dec. 31, 2013, with the increase due primarily to BAM's $1.8 billion contingent
obligation related to BPY's preferred stock issued in December 2014. Fitch
calculates this ratio as BAM corporate debt (including the $1.8 billion
contingent obligation of BPY's preferred stock and 50% of corporate preferred
stock) divided by parent-level cash flow, including assumed dividends upon BAM
supporting the $1.8 billion of BPY preferred stock.
Strong Management and Track Record
BAM, under the leadership of CEO Bruce Flatt, has been skillful in avoiding the
pitfalls that befell many commercial real estate owners in the recent past and
then opportunistic in exploiting their misfortunes by acquiring
controlling-class debt and/or making meaningful equity investments that provide
BAM significant influence or control over its investments. Mr. Flatt has been
CEO since 2002 and is only 49 and appears to have a highly competent leadership
team below him.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Asset management fee growth of 15%, consistent with the growth in expected
AUM, and consistent with BAM's demonstrated track record;
--Fee-related direct costs growth of 5%;
--Growth in distributions from investees of 5%, reflecting growth in underlying
cash flows at the affiliate level;
--5% growth in corporate overhead.
RATING SENSITIVITIES
The following factors may have a positive impact on BAM's ratings and/or
Outlook:
--Improvements in the underlying credit quality of investees that upstream
dividends to BAM, principally BPY;
--Decrease in leverage, measured by gross debt (including the $1.8 billion
contingent obligation related to BPY's preferred stock and 50% of existing
preferred stock issued by BAM) to recurring parent-level cash flow sustaining
below 4.0x (5.2x as of Dec. 31, 2014).
Conversely, the following factors may have a negative impact on BAM's ratings
and/or Outlook:
--Fitch's expectation of recurring parent-level cash flow coverage of fixed
charges sustaining below 3.0x (3.5x for the year ended Dec. 31, 2014);
--Fitch's expectation of an increase in leverage above 5.5x;
--Deterioration of the financial profile or operating performance of investees
that could reduce investees' dividends up streamed to BAM;
--A large corporate-level acquisition that is debt-funded.
Contact:
Primary Analyst
Steven Marks
Managing Director
+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Julie Jiang
Director
+1-212-908-0708
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email:
sandro.scenga@fitchratings.com.
Related Committee Held Date: March 5, 2015
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Rating Investment Holding Companies (pub. 25 Mar 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741159
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit
Analysis (pub. 25 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
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