NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the long-term IDR and senior unsecured debt ratings of Brookfield Asset Management Inc.(BAM) to 'BBB-' from 'BBB'. The Rating Outlook is Stable. The ratings were previously on Rating Watch Negative.
KEY RATING DRIVERS
The rating action reflects Fitch's application of the 'Rating Investment Holding Companies' criteria, in particular the quality and diversification of dividend flows from investees.
Dividend Subordination, Limited Diversity and Weak Credit Quality
Almost 40% of BAM's 2014 dividends were received from Brookfield Property Partners (BPY), an entity that Fitch views as having a below investment-grade credit profile. BAM receives over $1 billion of dividends from listed investees; however, these dividends are after any corporate level and project specific debt at the investee level. Thus, there is subordination to investee cash flows in the organizational structure, and the weighted-average credit quality of the dividend flow from analyzed investees is considered below investment-grade. Fitch estimates that over 75% of BAM's deconsolidated recurring cash flows are derived from investee dividends.
The remainder of BAM's recurring holding company-level cash flows are from its asset management business. BAM receives asset management base fees, general partner fees, incentive distributions, and performance (carry) fees. Fitch included in recurring fee streams the base fees, but excluded other fees due to their potentially being non-recurring or volatile. Fitch considers the recurring nature of the base fees to be strong, given their contractual nature and the expected growth in assets under management, which were approximately $200 billion as of Dec. 31, 2014.
Good Dividend Coverage of Fixed Charges
Distributions and fees, net of fee-related expenses and corporate-level expenses, provide good coverage of interest costs and fixed charges of BAM's outstanding parent-level corporate obligations. Coverage was 3.5x and 2.7x for the years ended Dec. 31, 2014 and 2013, respectively, and Fitch expects coverage to improve to the high-3.0x's range over the next two years.
Strong Financial Flexibility and Strong Liquidity
The holding company structure, with BAM's largest investments held in multiple majority-owned publicly-listed companies, enhances BAM's financial flexibility in managing the capital structures of its operating subsidiaries.
The holding company structure also protects BAM from having any recourse indebtedness of its investees. Other than support of $1.8 billion of preferred stock issued by BPY, parental guarantees or other contingent supports are limited. Additionally, there are no cross default provisions between subsidiaries or between the parent and subsidiaries.
BAM has a liquidity coverage ratio exceeding 2.5x, indicative of strong liquidity. The good liquidity is driven by limited debt maturities over the next 2.5 years, combined with over $1.2b available under the company's unsecured revolving credit facility.
Significant Control over Subsidiary Dividends
BAM's meaningful ownership and board representation for its subsidiaries likely enables it to influence the dividend distribution policies, such that it can have some control over cash flows available to meet corporate-level debt service.
Stable Dividends for BEP & BIP; BPY Less Certain
BPY is a relatively new company and its dividend track record remains unproven, having paid only six quarterly dividends since fourth-quarter 2013 (4Q'13). In addition, BPY's high leverage increases the risk of a dividend reduction in the event of a downturn in commercial real estate fundamentals. Brookfield Renewable Energy Partners' (BEP) dividend has been stable since 1999 inception with no declines, and slight increases every few years. Brookfield Infrastructure Partners' (BIP) dividend since 2008 inception has been stable and growing, with no declines.
High Leverage on a Debt/Corporate Cash Flow Basis
BAM's leverage was 5.2x as of Dec. 31, 2014. This ratio is up from 4.5x as of Dec. 31, 2013, with the increase due primarily to BAM's $1.8 billion contingent obligation related to BPY's preferred stock issued in December 2014. Fitch calculates this ratio as BAM corporate debt (including the $1.8 billion contingent obligation of BPY's preferred stock and 50% of corporate preferred stock) divided by parent-level cash flow, including assumed dividends upon BAM supporting the $1.8 billion of BPY preferred stock.
Strong Management and Track Record
BAM, under the leadership of CEO Bruce Flatt, has been skillful in avoiding the pitfalls that befell many commercial real estate owners in the recent past and then opportunistic in exploiting their misfortunes by acquiring controlling-class debt and/or making meaningful equity investments that provide BAM significant influence or control over its investments. Mr. Flatt has been CEO since 2002 and is only 49 and appears to have a highly competent leadership team below him.
Fitch's key assumptions within our rating case for the issuer include:
--Asset management fee growth of 15%, consistent with the growth in expected AUM, and consistent with BAM's demonstrated track record;
--Fee-related direct costs growth of 5%;
--Growth in distributions from investees of 5%, reflecting growth in underlying cash flows at the affiliate level;
--5% growth in corporate overhead.
The following factors may have a positive impact on BAM's ratings and/or outlook:
--Improvements in the underlying credit quality of investees that upstream dividends to BAM, principally BPY;
--Decrease in leverage, measured by gross debt (including the $1.8 billion contingent obligation related to BPY's preferred stock and 50% of existing preferred stock issued by BAM) to recurring parent-level cash flow sustaining below 4.0x (5.2x as of Dec. 31, 2014).
Conversely, the following factors may have a negative impact on BAM's ratings and/or outlook:
--Fitch's expectation of recurring parent-level cash flow coverage of fixed charges sustaining below 3.0x (3.5x for the year ended Dec. 31, 2014);
--Fitch's expectation of an increase in leverage above 5.5x;
--Deterioration of the financial profile or operating performance of investees that could reduce investees' dividends upstreamed to BAM;
--A large corporate-level acquisition that is debt-funded.
The 'Rating Investment Holding Companies' criteria report was the primary analytical approach applied, given the holding company structure. The 'Corporate Rating Methodology' criteria was used to supplement the analysis with respect to recurring fee revenue, management strategy and corporate governance.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014);
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating Investment Holding Companies' (March 25, 2014).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Investment Holding Companies