upgraded the Issuer Rating, long-term obligations, and preferred shares credit ratings of Brookfield Corporation (BN or the Company) and its guaranteed subsidiaries, including BN’s Issuer Rating and Senior Notes to “A” from A (low) and its Preferred Shares rating to Pfd-2 from Pfd-2 (low). In addition, DBRS Morningstar confirmed the short-term credit ratings of BN and its guaranteed subsidiaries at R-1 (low). All trends are Stable. These actions remove the long-term and preferred share ratings on BN and its subsidiaries from Under Review with Positive Implications as well as the short-term ratings from Under Review with Developing Implications where they were placed on September 27, 2023, to conduct a review of the Company and the methodological approach to the credit ratings. For more information, please see the related press release here: https://www.dbrsmorningstar.com/research/421150/dbrs-morningstar-places-certain-ratings-of-brookfield-corporation-and-its-subsidiaries-under-review-with-positive-implications.
During the course of its review, DBRS Morningstar conducted a credit analysis of Brookfield Asset Management Ltd. (BAM) using the “Global Methodology for Rating Investment Management Companies” and of Brookfield Reinsurance Ltd. (BNRE) using the “Global Methodology for Rating Insurance Companies and Insurance Organizations.”
KEY CREDIT RATING CONSIDERATIONS
BN’s and its guaranteed subsidiaries credit ratings reflect the Company’s (1) position as the parent company of BAM (75% ownership), (2) position as the substantial owner of BNRE (majority economic interest), (3) position as the parent company of Brookfield Property Partners L.P. (BPY, rated BBB (low) with a Stable trend by DBRS Morningstar; 100% ownership), (4) position as the parent company of Brookfield Renewable Partners L.P. (BEP, rated BBB (high) with a Stable trend by DBRS Morningstar; 46% ownership), and (5) strong consolidated credit metrics, liquidity profile, and industry diversification. For each BN business that contributes a material portion of the Company’s consolidated distributable earnings or already had a DBRS Morningstar public credit rating, DBRS Morningstar assessed its credit quality based on its proportionate contribution, adjusted for BN’s ownership interest in the subsidiary (the Composite Rating). DBRS Morningstar then adjusted the Composite Rating for the following overlay factors: (1) the structural subordination on the leveraged cash flows from BNRE, BPY, and BEP, (2) the Company’s superior industry diversification, and (3) BN’s very strong liquidity. The result is an overall Issuer Rating of “A.”
CREDIT RATING DRIVERS
The credit ratings on the Company and its guaranteed subsidiaries reflect those of its primary business units and operating companies, namely BAM, BNRE, BPY, and BEP. Significant improvement in the credit risk profiles of one or more of these businesses may result in an upgrade of BN’s credit ratings.
Conversely, a deterioration in the credit risk profile(s) of BN’s primary business units and operating companies; a material increase in debt at the Company; debt at BAM that causes debt at BN to be structurally subordinated to a greater percentage of its cash flows; or a deterioration in governance controls may result in a downgrade of BN’s credit ratings.
CREDIT RATING RATIONALE
These credit rating actions reflect DBRS Morningstar’s assessment of BN’s key subsidiaries and overlay factors, including the following:
Subsidiaries
BAM—BAM’s credit profile benefits from its position as one of the largest alternative asset managers in the world, with more than $440 billion of fee-bearing capital, the majority of which is long term (10+ years) or perpetual in nature. Assets under management (AUM) have grown significantly in the last five years, indicative of BAM’s strong fundraising abilities, capital resources, and investment track record. BAM’s capital-light business model, growth in AUM, and high margins have resulted in strong earnings, the majority of which are distributed to BN. BAM also has no corporate debt and very strong liquidity. DBRS Morningstar’s assessment of BAM’s credit profile also considers that the nature of the funds it manages are relatively illiquid and that the current macroeconomic environment could result in increased impairments, defaults, and lower valuations in some of its investments. DBRS Morningstar notes that while in the short-term, this would not have a significant impact on the credit profile of BAM, in the medium to long term this could impact the ability for the business to continue to grow its fee-bearing capital.
BNRE—BNRE’s credit profile is supported by the expectation of improved market position and franchise strength over the near to medium term, particularly in the Annuity and Property and Casualty (P&C) business lines; improved earnings stability as it develops a sizable base of recurring premium revenues; and strong investment from BN to execute on its growth plan and to meet capital requirements. DBRS Morningstar’s assessment of BNRE’s credit profile also considers a limited track record of operations to assess historical profitability of the consolidated entity; the risk and uncertainty related to its aggressive growth plans; and that the credit and market risk of its investment portfolio, its financial leverage, and its capital needs are high relative to other insurers.
BPY—BPY’s credit profile benefits from its market position as a preeminent global real estate company; its high-quality assets (particularly the BPY Core Office and Retail segment) with long-term leases to large, recognizable investment-grade-rated tenants; and its superior diversification by property, tenant, and geography. BPY’s credit profile is constrained by its weak financial risk assessment as reflected in its highly leveraged balance sheet and low EBITDA interest coverage, a riskier retail leasing profile in terms of lease maturities and counterparty risk relative to its Core Office segment, and a higher-risk opportunistic Limited Partnership Investments segment composed of hotel, office, retail, mixed-used, housing, and alternative assets.
BEP—BEP’s credit profile is supported by its long-term contracts with diverse, solid-credit counterparties; its diversified and large generation asset portfolio; and its low environmental risk, low-cost and high-quality assets. DBRS Morningstar’s assessment also considers BEP’s expansion risk; refinancing and recontracting risk at the project level; and hydrology and wind resource risk.
Overlay Factors
Structural Subordination—DBRS Morningstar notes that BN finances its assets on a non-recourse basis without any parental guarantees or cross-collateralization. BN’s debt is structurally subordinated to the leveraged cash flows from BNRE, BPY, and BEP; however, there is no corporate debt held at BAM, which, along with Direct Investments, accounted for 54% of consolidated distributable earnings in the last 12 months ended September 30, 2023.
Diversification—DBRS Morningstar believes that the Company benefits from cash flow stability resulting from superior industry diversification of its business units and operating companies. BN’s cash flows are generated from diversified businesses comprising asset management, insurance solutions, real estate, private equity, infrastructure, and renewable power.
Liquidity—DBRS Morningstar considers BN’s liquidity to be very strong because of its $1.5 billion in cash and financial assets, $2.5 billion in undrawn and committed credit facilities, and $4.6 billion in annualized distributions at September 30, 2023. DBRS Morningstar also notes that, including perpetual affiliate liquidity and uncalled private fund commitments, BN and its subsidiaries had a total of $119 billion in liquidity as of September 30, 2023.
Issues affected are (deep breath): BN.PF.A, BN.PF.B, BN.PF.C, BN.PF.D, BN.PF.E, BN.PF.F, BN.PF.G, BN.PF.H, BN.PF.I, BN.PF.J, BN.PF.K, BN.PF.L, BN.PR.B, BN.PR.C, BN.PR.K, BN.PR.M, BN.PR.N, BN.PR.R, BN.PR.T, BN.PR.X and BN.PR.Z. Not to be forgotten is the Brookfield Investments Corporation, BRN.PR.A, which is not tracked by HIMIPref™.
BN Upgraded to Pfd-2 by DBRS
DBRS has announced (on 2023-11-22, they say, but I swear I looked and didn’t see it) that it:
Issues affected are (deep breath): BN.PF.A, BN.PF.B, BN.PF.C, BN.PF.D, BN.PF.E, BN.PF.F, BN.PF.G, BN.PF.H, BN.PF.I, BN.PF.J, BN.PF.K, BN.PF.L, BN.PR.B, BN.PR.C, BN.PR.K, BN.PR.M, BN.PR.N, BN.PR.R, BN.PR.T, BN.PR.X and BN.PR.Z. Not to be forgotten is the Brookfield Investments Corporation, BRN.PR.A, which is not tracked by HIMIPref™.
Thanks to Assiduous Reader peet for bringing this to my attention!
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