BAM Reconfirmed at Pfd-2(low), Trend Negative, by DBRS

As reported on PrefBlog, DBRS confirmed BAM, but changed the trend to negative on March 5. Apparently, they found the experience so exciting that they have done it again:

DBRS has today confirmed the ratings of Brookfield Asset Management Inc. (BAM or the Company). The ratings pertain to BAM at the corporate level and remain on a Negative trend since the last trend change on March 5, 2013. The trend change followed the downgrade of the Issuer Rating of BAM’s subsidiary, Brookfield Office Properties Inc. (BOP), to BBB from BBB (high) and reflects that BAM’s ratings are under pressure because of BOP’s weaker credit quality, as well as the sustained high debt level at BAM’s corporate level. The downgrade of BOP’s rating reflects increased uncertainty due to material near-term maturing tenancy agreements, increased leverage and lower cash flow coverage metrics. As such, DBRS believes that the quality of cash flows remitted to BAM from this material subsidiary, which is available after BOP satisfied its own debt servicing and operating needs, is also weakened.

BAM’s corporate-level cash flow metrics for the full-year 2012 were close to the previously set targets for the ratings. Funds from operations (FFO)-to-total debt in 2012 was 28% compared to 30% in 2010 (23% and 26%, respectively, after adjusting in accordance with DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), published on November 5, 2012) while FFO interest coverage was 4.9x in 2012 compared to 5.1x in 2010 (4.4x and 5.0x, respectively, after adjusting for the same).

As consistent with the Negative trend, BAM will be challenged to improve the overall quality of its investments over time through increasing the proportion of investments with strong BBB or better credit quality and more conservative use of leverage at the operating-company level. With weaker quality of cash flow from BOP and increasing leverage (and therefore debt servicing requirements) in its key subsidiaries in recent years, DBRS also believes that the cash flow metrics at BAM’s corporate level will need to be raised in order to maintain the necessary cushion for the ratings. Specifically, DBRS expects BAM to further improve its corporate-level FFO-to-debt toward 35% (or about 30% on an adjusted basis) and FFO interest coverage toward 5.5x (or about 5.0x on an adjusted basis), and to maintain at these levels on a sustained basis.

DBRS will monitor the progress during the course of 2013 and could consider a one-notch downgrade of BAM’s ratings if it becomes evident that the Company will be unable to meet any of the above expectations and to remedy the shortfall within an acceptable timeframe.

The downgrade of Brookfield Office Properties was also reported on PrefBlog.

A downgrade of BAM would also have an immediate effect on the SplitShares issued by BAM Split Corp.: BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E.

It also seems likely that a BAM downgrade would involve collateral or related damage to the ratings of Brookfield Properties Corp (BPO.PR.F, BPO.PR.H, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T), Brookfield Office Properties (BPP.PR.G, BPP.PR.J, BPP.PR.M), Brookfield Renewable Power Preferred Equity Inc (BRF.PR.A, BRF.PR.C, BRF.PR.E) and Brookfield Investments Corporation (BRN.PR.A).

Brookfield Asset Management is the proud issuer of:

RatchetRate BAM.PR.E
FixedFloater BAM.PR.G
OperatingRetractible BAM.PR.J, BAM.PR.O
Straight Perpetual BAM.PR.M, BAM.PR.N, BAM.PF.C

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