DBRS Affirms BAM at Pfd-2(low)

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.

9 Responses to “DBRS Affirms BAM at Pfd-2(low)”

  1. […] 2008-09-06: BAM.PR.N was recently affirmed at Pfd-2(low) by […]

  2. bobmcmu says:

    My simple rookie investor question about BAM.pr.N and M is very simple. Are they relatively safe dividend income producing sources in these volatile times …. I am a retired senior who wants dividend income and they seem to fit the bill at this moment?

  3. jiHymas says:

    I have to be very careful here …

    OK, Brookfield Asset Management is a good name. It’s a good solid credit, rated by DBRS as Pfd-2(low) and by S&P as P-2. This isn’t as strong as, say, the Big 6 chartered banks, but is considered “investment grade”. They will be suitable for most portfolios.

    However, before you do anything else, you should read my essay on portfolio construction. While BAM is a good name, it is not a great name. Just as with salt in the soup, a certain amount of it in your portfolio can be a Good Thing, but too much is a Bad Thing. You must always remember that this is an uncertain world; make sure that wiping you out will be a very difficult thing for a malevolent universe to accomplish.

    I don’t really want to go into too much detail since I know nothing about you. However, as a rookie investor you should consider each of the following options, alone or in combination:

    • hiring an investment advisor
    • subscribing to PrefLetter, my newsletter with recommendations
    • purchasing an exchange traded fund instead (CPD or DPS.UN on the Toronto Exchange
    • investing in my fund

    I regret not being able to give you a one-word answer … but simple questions often have complicated answers.

  4. bobmcmu says:

    Thank you and I appreciate your carefully selected words. BAM.N is but a small portion of my portfolio …. but having found this website, I asked the question. And yes, we are diversified ….

  5. donsis says:

    I sent you an email from the Forum and I wish I had read this before I sent it. It’s a little reassuring.
    I just hope holding 500 BAM.B and 200 BAM.N is not a “bad thing”. My Advisor has purchased 325 BAM Split Corp Preferred Class A for me in my Cash account at BMO Nesbitt Burns as well. I gave up trying to select them on my own and bought 1000 CPD for my independent account. It’s doing better than BAM.
    I probably should have stuck with GICs but it’s too late for that now.

  6. jiHymas says:

    The key is diversification. I would suggest that the upper limit for exposure to any Pfd-2 name would be about 20% of a preferred share portfolio, and preferably more like 10%.

  7. […] of a helpful bent are encourage to air their view on BAM credit quality, where some concern is being expressed regarding the recent hammering of BAM’s […]

  8. chrisj says:

    I am considering purchasing either a BAM retractible, H,J or O or the BAM Split Corp series A. I have read your article on Split Shares from July and as a Preferred novice I would appreciate feedback on what happens if the BAM shares backing up the split corp drop below the asset coverage, say in 2012 when retraction option is in place? How does the retraction of the A’s effect the outstanding B and C issues?

  9. jiHymas says:

    what happens if the BAM shares backing up the split corp drop below the asset coverage

    If the company does not have the resources to meet its obligations, they will not be met and the splitShare holders will lose money.

    How does the retraction of the A’s effect the outstanding B and C issues?

    According to the 2007 Annual Report:

    The Class A and Class AA Series 1 Preferred share Retraction Price will be equal to the lesser of (i) 95% of Net Asset Value per Unit; and (ii) $25.00 less 5% of the Net Asset Value per Unit, in either case less $1.00.

    Therefore, the retraction of As will always be below NAV. Therefore, a retraction of As will always increase the NAV available to the surviving shareholders.

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