Update for Brookfield
Dear Shareholders,
Given all the market volatility of the last few weeks, we
thought it would be helpful to provide an update on where we stand as a
company. No one is immune to the issues we are all dealing with, but as you know from our letters over the
years, we have been expecting a recession and market washout for some time.
Nobody could have predicted that the coronavirus would be the cause, but the
markets sure turned over the last month.
As to our positioning and readiness for this, we believe we
are in very good shape. We think it is important for you to know a few points:
• We
have approximately $12 billion of bank lines in BAM and our four listed
affiliates, all of which are very long-term, and importantly are all
virtually 100% undrawn with global financial partners who we trust.
• We
have approximately $5 billion of financial and non-core assets that can be
liquidated with relative ease (even in today’s markets) should we so
choose, to fund strategic investments or take care of issues. Many of these are
hedged with index hedges so even if markets are down, this should offset marks
that may come about due to the environment.
• We
have only $7 billion of corporate debt (against an equity market cap of $40 to
$60 billion – depending on the day) and none of that debt is coming due for
many years. Similarly, in our private funds and listed affiliates, we
have very little debt coming due over the next few years. To the extent that we have debt
due, they are financings and mortgages secured by individual assets (which
confines any impact to the asset). However, even in 2008/09 we were able
to roll those over.
• We
have no ‘hung purchases’. In fact, it’s the opposite – one way or
another, every contested deal we tried to do over the past five months, we
lost. We remained disciplined, which meant that we did not buy a number of
businesses as their price rose. In hindsight, this was good.
• We
just finished raising our latest funds and co-investments, totaling over $50
billion. These are only 40% invested, so we have a lot of capital to put
to work in this environment. We also have the support of many leading sovereign
and institutional investors in the world to augment these resources.
• We partnered
with Oaktree last year in anticipation of the debt markets unwinding.
Now it’s taking place. The team at Oaktree is accelerating the pace of
deployment of their current distressed debt fund and preparing to launch their
next fund, which we think could significantly exceed the size of their last. If
this turns out to be the case, the addition of this business to ours will be
very additive for us and our clients.
• Most
of our businesses are very resilient, and we therefore don’t foresee major issues.
Of course, with people staying home, business is slowing everywhere. In our
operations, for example, our malls will be operating at a significantly reduced
rate for a while (but this is a second derivative exposure as we collect rent,
not run the stores, and our financing structures are in good shape), and fewer
ships will travel to our ports. The bottom line is that while there are certain to be issues across our
portfolio, our businesses are diversified, our financing structures are
time-tested, and our resources significant to deal with this.
• Much
of what we own around the world is critical infrastructure – across our
property, infrastructure, renewable power and industrial businesses. We are
working with governments and our employees to ensure that these facilities
remain operational through this period. While many are at home now, people and companies still need corporate
premises, infrastructure, power, broadband, utilities and many other critical
services that form the backbone of the global economy, and that Brookfield
As to what we do now, here is how we are approaching this
market volatility and uncertainty:
• Most
importantly, we are staying calm and ensuring our people are safe. For
us, compared to the direct hit we took on 9/11, this uncertainty and volatility
feels manageable. In 2008, with the banking system failing, real asset owners
didn’t know if many lenders were going to exist in the future. Today, the
banking system is in far better shape. It never feels very good to have this
degree of chaos, but this will pass.
• We
are being vigilant and will continue to be disciplined. We will maintain
capital for our worst-case scenarios. This is always very important, but even
more so now.
• We
have switched our focus for investments to the listed stock markets, and
through our Oaktree franchise, the traded debt market. There are some
stocks and debt starting to trade at a large discount to intrinsic value and we
are focused on these. We are also starting to receive calls from companies in
need of capital, and we look forward to being helpful to companies in need,
where we can.
• Our
shares have sold off along with everything else. We have been acquiring, and
will continue to acquire our own shares for value when it makes sense –
and in time, we are certain they will recover.
•
Interest rates are now 100 basis points lower than they were a month ago. The
value of many real assets is therefore higher, and our clients’ need for our
offerings even greater. In time, this will all flow through to our
assets and the valuations of our business.
Finally, a reminder
regarding investing in times like these: the underlying value of a business
that trades in the public market does not change on an hourly basis. Despite
the fluctuations, you own a part of an actual business, not a piece of paper or
electronic symbol that adjusts on a minute-by-minute basis.
Acknowledging that the value of some businesses has changed,
at least in the short term (airlines being the most extreme example at the
moment), the long-term value of many
companies – i.e., the discounted stream of cash flows based on an estimate of
growth and durability into the future – has not changed substantially over the
past few months. The proviso is that a company must be able to pay its
liabilities when due (stay solvent), which of course will be an issue for
numerous companies in the absence of government assistance. Our focus has
always been on structuring our affairs to ensure we can survive all
environments, and we are confident we are in this position today.
Most of our cash flow
streams are of very long duration with long-term property leases, long-term
power sale contracts, and long-term regulated utility rates that provide
durable business revenues with strong counterparties. As a result, the
change in value of our businesses in the stock market over a few months has
very little to do with the underlying businesses that you, as a shareholder,
own. Please remember that you each own a portion of the investment management
fees our business generates, as well as a portion of each of the durable
businesses and assets we own.
It would be less distracting if we all owned this business
together privately. That way you could read our materials, look at how each of
our businesses is doing, observe the cash flows projected for many years, and
not worry about how the stock market, with its short-term focus, values this
information. We publish our views of how we value this business, and we
encourage you to focus on these values over time (adjusted upward or downward
as you see fit) and not on the stock price when volatility is at an extreme. In
fact, the main reason to consider the stock price at moments like these is that
it allows you to acquire a portion of our business at a large discount from its
real value.
It is very easy to
invest in the markets when times are good, but it is in times of market decline
that following the tenets of value investing matters most. We encourage you
to follow them. We know this is a very stressful time for everyone. Please know
that we are watching out for your capital.
Be safe and please wash your hands,
Bruce Flatt
Chief Executive Officer
March 23, 2020
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