DBRS: BAM is Not-Quite-Trend-Negative

DBRS has announced that it:

has today confirmed the ratings of Brookfield Asset Management Inc. (BAM or the Company) at A (low), R-1 (low) and Pfd-2 (low). The ratings pertain to BAM at the corporate level. The ratings remain on a Stable trend, notwithstanding weaker corporate-level financial metrics in 2011 because of increased corporate-level debt to finance the growing invested capital. DBRS recognizes that the financial metrics are now weak for the ratings and believes that there is currently minimal room for further deterioration without pressuring the ratings. If one of the following scenarios were to materialize, DBRS will review and base our rating decision on an assessment of the contributing causes, the Company’s remedial plan and other relevant circumstances. These scenarios are: (1) Material increase in the proportion of BAM’s invested capital in less-stable opportunistic investments and private equity, leading to debt increases. (2) Material deterioration or rating downgrade in one or more of the core businesses. (3) Inability to improve cash flow coverage metrics (which could include funds from operations (FFO)-to-debt and FFO fixed charge coverage) to their 2010 levels by the end of 2012.

BAM’s corporate-level debt and issuance of preferred shares have increased in the past two years to partly finance its investments. In the meantime, operating cash flows from its investments recorded only modest growth. As a result, BAM’s corporate-level cash flow coverage metrics have weakened during the period, with FFO coverage-to-debt of 23% in 2011 (from 30% in 2010), FFO-to-interest of 4.5 times (x) (from 5.1x) and FFO-to-fixed charges (interests and preferred share dividend) of 3.1x (from 3.7x). We consider these 2011 levels weak for the ratings and expect improvement during 2012.

BAM’s corporate-level liquidity is strong, supported by corporate-level cash and available credit facilities of $2.4 billion as at December 31, 2011, and annual FFO after corporate expenses of about US$1.0 billion. Currently, there is no material debt repayment scheduled until 2014, when US$518 million comes due. The Company’s financial flexibility is further supported by its ability to access its external investor base and capital markets and to monetize part of its investments in listed vehicles, estimated to have a market value of US$17.9 billion (covering 3.8x the corporate-level debt of US$4.7 billion). While BAM’s liquidity should comfortably cover its corporate-level needs, DBRS notes that the Company remains largely dependent on external investors’ capital and equity issuances to support its growth.

This follows a similar, but more emphatic judgement by S&P.

BAM is the proud issuer of a great many preferred share issues: BAM.PF.A, BAM.PR.B, BAM.PR.C, BAM.PR.E, BAM.PR.G, BAM.PR.I, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.O, BAM.PR.P, BAM.PR.R, BAM.PR.T, BAM.PR.X and BAM.PR.Z.

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