Fitch Publishes 'A' IDRs for Brookfield Asset Management; Outlook Stable

Published: 2025-04-22 05:10:10 ET BN

Fitch Ratings has published Long-Term Issuer Default Ratings (IDRs) of 'A' for Brookfield Asset Management Ltd. (BAM) and its wholly owned subsidiary, Brookfield Asset Management ULC (Brookfield ULC).

The Rating Outlook is Stable. Concurrently, Fitch has assigned an expected rating of 'A(EXP)' to BAM's proposed unsecured debt issuance. Debt issuance proceeds are expected to be used for general corporate purposes.

The 'A-' rating and Stable Outlook assigned to Brookfield Corporation (Brookfield) are unaffected by these actions. Brookfield has a 73% ownership stake in BAM.

Key Rating Drivers

Global Investment Manager: The rating assigned to BAM reflects its competitive position as a global alternative investment manager (IM), meaningful product-line diversity, solid investment track record, significant fee-bearing assets under management (FAUM), a strong fee-related EBITDA (FEBITDA) margin, relatively low leverage, and solid liquidity profile given the cash-generative nature of the business and expected contingent funding availability from minimum balance sheet cash and revolver capacity.

Higher NAV Fee Exposure: Rating constraints specific to BAM include higher exposure to management fees charged on the basis of net asset value (NAV) relative to peers, more limited revenue diversity at present, given the lack of a meaningful realized carry component for several years, and a relatively high payout ratio, with a target of 90% or more.

Reputational Risk: Rating constraints for the alternative IM industry more broadly include 'key person risk', which is institutionalized throughout many limited partnership agreements, reputational risk, which can impact a manager's ability to raise future funds, and legal, political and regulatory risk, which could alter the alternative asset space. Fitch also notes the more challenging macroeconomic conditions, including elevated interest rates and slowing GDP growth, which may pressure investment performance and fundraising.

FAUM Expansion Continues: BAM's fundraising trends remained strong in 2024, with $129 billion of FAUM inflows. FAUM reached $538.5 billion at YE 2024, up 17.8% from a year ago. FAUM growth is expected to continue in the near-term, given fundraising plans and expectations of AUM doubling by 2029.

Strong FEBITDA Margin: BAM's core operating performance has been strong over time. FEBTIDA was up 8.8% in 2024 YoY as growth in management fees surpassed increases in compensation and other expenses. Fitch expects FEBITDA to expand further in the coming years, with continued fundraising and capital deployment. BAM's FEBITDA margin was 51% in 2024 and averaged 51.2% from 2021-2024, which is within Fitch's 'aa' category earnings and profitability benchmark range of greater than 50% for alternative IMs. At YE 2024, BAM had $53 billion of committed capital that it estimates will contribute $530 million of additional revenue once invested.

Limited Leverage: BAM had no long-term borrowings outstanding at YE 2024. Although leverage will increase with the proposed unsecured debt issuance, BAM is expected to manage leverage at-or-below 1.5x on a debt-to-distributable earnings basis over the medium term. Fitch believes this ratio will approximate 1.5x on a debt-to-FEBITDA basis as well because realized carried interest will remain relatively modest until new vintage funds season. Still, as realized carried interest becomes more material to BAM, distributable earnings and FEBITDA will begin to diverge. Fitch expects management to revisit its leverage target as realized carried interest becomes more meaningful, as carry is not expected to be leveraged to the same extent as FEBITDA.

Solid Liquidity Profile: Fitch believes BAM has a solid liquidity profile, given its strong cash earnings, $404 million of cash and equivalents at YE 2024 and $1.05 billion of borrowing capacity on corporate revolvers. While interest expense will increase with the contemplated issuance, Fitch expects BAM to retain a FEBTIDA/interest expense ratio within the 'a' category benchmark range of 8x-12x as leverage approaches 1.5x. BAM is expected to maintain a balance sheet light strategy and has limited unfunded commitments to its funds, as investor alignment is largely provided by Brookfield and its perpetual affiliates.

BAM's payout ratio is expected to be between 90%-95% over the Outlook horizon, which would be above the rated-peer average. Still, Fitch believes the company has the flexibility to reduce dividends, if necessary, to bolster liquidity.

Stable Outlook: The Stable Rating Outlook reflects Fitch's expectations that BAM will continue to generate stable management fees, maintain a strong FEBITDA margin, retain FAUM through the raising of new and expansion of existing funds, maintain leverage on a FEBITDA basis at 1.5x or below and retain a solid liquidity profile.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Weaker investment performance that adversely affects the firm's ability to generate FEBITDA, which results in a sustained increase in cash flow leverage above 2.0x, a sustained reduction in interest coverage below 10.0x, a key person or reputational event that challenges fundraising and FAUM growth, and/or an impairment of the liquidity profile as it relates to operating needs and contingent funding resources could yield negative rating momentum.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Continued scale and diversification of the product platform, a material increase and demonstrated stability in realized carried interest, the maintenance of leverage at-or-below 1.0x, and enhancement of the liquidity profile, including maintenance of interest coverage at-or-above 12.0x and a decline in the payout ratio, which allows a larger on-balance sheet cash reserve and reduction in net debt would be positive for ratings.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The expected unsecured debt rating is equalized with the Long-Term IDR, reflecting BAM's fully unsecured funding profile and average recovery prospects for the notes under a stressed scenario.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The expected unsecured debt rating is linked to the IDR and is expected to move in tandem.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

The ratings assigned to Brookfield ULC are linked to the IDR of BAM and are, therefore, expected to move in tandem with the ratings of the holding company.

ADJUSTMENTS

The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.

The Asset Performance score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).

The Earnings & Profitability score has been assigned below the implied score due to the following adjustment reason(s): Revenue diversification (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.