Fitch Withdraws Ratings For Brookfield Asset Management

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed and withdrawn the following ratings for Brookfield Asset Management Inc. (BAM):

Brookfield Asset Management Inc.

--Issuer Default Rating (IDR) affirmed and withdrawn at 'BBB-';

--Senior Unsecured Notes affirmed and withdrawn at 'BBB-'

The Rating Outlook is Stable.

Fitch has chosen to withdraw the ratings for BAM for commercial reasons.

KEY RATING DRIVERS

Dividend Subordination, Limited Diversity and Weak Credit Quality

Over 50% of BAM's 2015 dividends were received from Brookfield Property Partners (BPY), an entity that Fitch views as having a below investment-grade credit profile. BPY has double-digit leverage on a debt/recurring operating EBITDA basis, and despite having material amounts of corporate-level unsecured debt, BPY has limited unencumbered assets outside of its common ownership stake in General Growth Properties, which Fitch believes BPY would be unlikely to liquidate. BAM receives $1.2 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 Fitch considers the weighted-average credit quality of the dividend flow from analyzed investees to be 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 $225 billion as of Dec. 31, 2015.

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. Fitch estimates that coverage was 4.4x and 3.5x for the years ended Dec. 31, 2015 and 2014, respectively, and Fitch expects coverage to sustain at current levels 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 6x, indicative of strong liquidity. The good liquidity is driven by limited debt maturities over the next 2.5 years, combined with over $1.6b available under the company's unsecured revolving credit facilities.

Stable Dividends for BEP & BIP; BPY Less Certain

BPY is a relatively new company and its dividend track record remains unproven, having paid only ten 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 4.5x as of Dec. 31, 2015. This ratio is down from 5.2x as of Dec. 31, 2014, with the decrease due primarily to the increase in BAM's parent-only cash flow during 2015. 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.

Appropriate Leverage on an LTV Basis

BAM's corporate debt (including the $1.8 billion contingent obligation of BPY's preferred stock and 50% of corporate preferred stock) divided by a stressed valuation of the market value of investees is approximately 35%, which is consistent with a rating in the 'BBB' category.

KEY ASSUMPTIONS

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.

RATING SENSITIVITIES

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 (4.6x as of Dec. 31, 2015).

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 (4.3x for the year ended Dec. 31, 2015);

--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

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Rating Investment Holding Companies (pub. 08 Jan 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875908

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878264

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000719

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000719

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160310005955/en/

Fitch Ratings
Primary Analyst
Steven Marks
Managing Director
+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Jiang
Director
+1-212-908-0708
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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