The Advantage of Asset Level Non-Recourse Financings

The Advantage of Asset Level Non-Recourse Financings

In this post Bruce Flatt explains how debt is handled at Brookfield Asset Management. And if you’re wondering why I’m putting so much emphasis on the Brookfield family of companies…It’s because I own the parent company as well as all four of their limited partnerships. Together they make up over half of my entire portfolio…Too much risk you think…For me risk is about not being familiar with what you own, which is one of the biggest problems with too much diversification. But that’s just me.  Every individual investor will in time have to come to terms with how much diversification is right for him or her. And speaking about being more familiar with what one owns, Bruce Flatt spells out below just how the all-important issue of the companies debt is managed at Brookfield.

We operate with debt on an asset level basis in order to reduce risk and maximize return on capital. The benefits of asset level debt, versus corporate level debt, have proven to be significant over many decades. As a result, the make-up of our liabilities is very different from many others, and our consolidated balance sheet is simply the sum of the debt on each asset and each balance sheet that we manage and consolidate. Our total debt is the summation of over 500 similar asset financings – each on average at 50% loan to value, and each of which stands on its own, with no recourse to Brookfield Asset Management.

Each financing is recourse only to the asset it finances, with no recourse to anything else. As a result, our leverage is extremely low risk and has stood the test of time over the past 30 years – including during periods of stress. We pride ourselves on being a great counterparty to those who lend us money but at the same time, we have no obligation to deal with any specific asset financing. Our debt is very carefully managed and has been a core strength, giving us confidence to go on offense when many corporate borrowers become stressed.

As an example, the Clarios financing mentioned earlier is recourse only to Clarios. It is not recourse to Brookfield Asset Management, Brookfield Business Partners, or our Private Equity fund; nor is it cross-collateralized to anything. It stands alone, like virtually all of our financings. For accounting purposes, however, we are obliged to show this non-recourse asset level debt on our Brookfield Asset Management consolidated balance sheet. This is required because we are the manager of the fund that acquired the company, but it is not corporate debt.

Lastly, at $7 billion, our corporate level debt is very modest in the context of our $50 billion market capitalization and more than $2 billion of annual corporate free cash flows.

Bruce Flatt,

Excerpt from Brookfield Asset Management’s Quarterly Letter,

May 9, 2019