BAM preferreds have suffered since the credit crunch got rolling last August so … I consider the otherwise routine affirmation of their credit rating by DBRS to be newsworthy:
DBRS has today confirmed the ratings of Brookfield Asset Management Inc. (Brookfield or the Company), including its A (low) Senior Notes and Debentures rating.
Brookfield’s credit profile continues to be supported by solid credit metrics and liquidity at the corporate level as it benefits from strong free cash flow generation from its diverse investments. Despite an increase in overall consolidated leverage in recent years, Brookfield has maintained solid interest coverage ratios at the corporate level and cash flows are now generated from a more stable asset base than in past years. As well, DBRS remains comfortable that the subsidiary debt is non-recourse to Brookfield and so far is supported by Brookfield’s solid balance sheet and good liquidity at the corporate level.
In 2007, the major acquisition of Multiplex Group (Multiplex) in Australia for $6.2 billion enhanced Brookfield’s commercial real estate portfolio by adding 8.5 million square feet of commercial office and retail space in major centres in Australia, as well as developments in Europe and the Middle East. Brookfield also established Brookfield Infrastructure Partners (BIP), which includes its Chilean transmission assets and certain North American timber assets, to represent a public vehicle for future growth of global infrastructure holdings. DBRS expects Brookfield to continue to establish further private and public vehicles to increase fees from third-party asset management activities; this should mitigate some of the risks with major acquisitions and raise capital to pursue other investments. The growth in asset management fees represents a stable source of cash flows at the corporate level.
DBRS notes that one of the major risks for Brookfield’s current ratings is the Company potentially undertaking significant acquisitions that materially increase financial risk at the corporate and/or subsidiary level. To date, Brookfield has maintained acceptable balance sheet ratios with just under 30% debt-to-total capital (book value) and cash flow-to-debt of 0.33 on a remitted basis (0.40 on an underlying basis). Brookfield’s coverage ratios also remained strong in 2007, with interest coverage on a remitted basis of 5.3 times and fixed charge coverage of 3.9 times. In 2007, Brookfield generated free cash flow (before one-time gains and after common dividends) of $558 million on a remitted basis or $1.4 billion including several large gains. Brookfield’s liquidity remains strong, with cash and financial assets at the end of Q1 2008 of $1.8 billion and $240 million available on its $800 million commercial paper limit.
Looking forward, DBRS expects Brookfield’s credit metrics to remain relatively stable or to improve slightly in 2008. Somewhat higher leverage (to finance major acquisitions) and weakness in the Company’s U.S. residential development business are expected to be more than offset by 1) higher cash flows from improved hydrology and pricing conditions in its power business, and 2) the contribution from dividends paid from its investment in Canary Wharf Group, plc.
The note that one of the major risks for Brookfield’s current ratings is the Company potentially undertaking significant acquisitions that materially increase financial risk at the corporate and/or subsidiary level is a little peculiar. It makes it seem as if DBRS has decided that BAM management is comprised of wild-eyed plungers, who are straining at the leash, eager to blow their (our!) money on a white elephant of some kind.
I’m pleased to see that they’ve highlighted the fact that an enormous chunk of their formal debt is secured by property and is non-recourse: I consider that quite important.
As I never fail to remind you, BAM has quite a few preferred issues outstanding: BAM.PR.B, BAM.PR.E, BAM.PR.G, BAM.PR.H, BAM.PR.I, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.O.
