Some thoughts.....1. I think BAM is over-leveraged and that increased credit costs, costs of capital, lower loan to values, could start stressing BAM. 2. BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV's start failing to meet capital contribution requirements. 3. Incestual sales and potentially unusual uses of related parties. 4. Potential slowdown in Alberta CN real estate. (BPO) 5. High occupancy rates in metro areas, possibly deteriorating because of reliance on financial service industry as well as potentially unusually high. 6. Recent exotic financings. One would be 1 Liberty Plaza NYC. I think the whole loan is $850M (350 + 500), 6.139% interest, Interest only till 7/2011 and then amorts over 360M, no prepayments until 4/2017 and maturity date is 8/2017. If I amortized correctly pay off balance on 8/2017 will be $777M. Certainly BAM received a lot of dollars, and via near interest only, BAM certainly has the lowest maximum payment at 6.139% for 10 years (2017). Then they balloon. 7. Industry credit tightness, and BAM's high leverage, could cause stress. Noting that $14 - $18B comes due on or before 2011. BAM has $33B of total debt. It seems as though a key thesis for a BAM long has been that the BAM investor thinks BAM has availability of low cost credit and on top of that has current debt that is very manageable because of thinking the debt with BAM and subsidiaries is one of operationally long-term in nature and primarily fixed rate financing. Historically that has been the case with BAM. It is my contention that this alleged long term fixed rate financing with ample liquidity for further leverage or refinancing is no longer as easy as it was. THE FOLLOWING IS AN IMPORTANT CONCEPT (IMO)BAM has total debt of $33B. On or before 2011, BAM has $14B - $18B of debt coming due. Included in the $33B is $1.6B due March 2009 for the purchase of Multiplex. BAM claims the debt has a LTV of less than 55%. One would wonder if other entities would question that LTV. An asset bought and negotiated from say March 2007 till October 2007 may have lost a bit of value. Has Multiplex lost any value, and if so, is that loss of value included in their estimation of LTV? If you look at the Multiplex Funds www.brookfieldmultiplexcapital.comYou can see how something has happened to values in Australia. I do not know if Multiplex has followed the same path downwards, but one needs to really consider whether values have decreased for BAM and if so, will refinancing of $1.6B be difficult. Maybe not, but certainly something to watch. Look at chart at end of page 1. Looks like price peaked when brookfield took over. I wonder if the price on this fund and other brookfield multiplex funds are just market driven. if so, I wonder if multiplex investment has gone down in value. If so, I wonder if financing needed will become at all difficult. I think there is one obvious thing that is going on in the markets. I also don't recall as many extensions on debt as opposed to recasting debt. That has been a trend on the street. Brookfield Properties has $6B coming due on or before 2011. This is included in the total BAM debt I referred to above. They have extended $89M this year, as opposed to refinanced. The extended is included in the $6B mentioned above. I did not include the debt due on discontinued operations. I do NOT consider $6B coming due on or before 2011 to be "long-term fixed-rate financing?" Much of the debt is interest only or with minor amortizations. No argument, all of their financings have been very preferential. Yet, we are in a different time now. Here is a collection of notes and links I put together http://www.rbcpa.com/companies/BAM.htmlI would be happy to debate and discuss BAM.
Randy,I have done quite a bit of research on BAM, as have you. I have learned a great deal from you in regards to BAM and other aspects during our tenure. I am quite certain that you would internally agree that I have also learned from me in regards to BAM. My intent is not to create FUD in regards to BAM or anything else, but to share and continue to research. Present research and learn from rebuttals and look further. I have refrained from insults and such towards you. You have often insulted me and such. It appears that you have actually via your writings attempt to create FUD about me. I have adressed what I consider (right or wrong) to be very relevant BAM issues. One such discussion which remains unanswered is the following:BAM has total debt of $33B. On or before 2011, BAM has $14B - $18B of debt coming due. Included in the $33B is $1.6B due March 2009 for the purchase of Multiplex. BAM claims the debt has a LTV of less than 55%. One would wonder if other entities would question that LTV. An asset bought and negotiated from say March 2007 till October 2007 may have lost a bit of value. Further in the concept of total debt of $33b, of which at least $14B is coming due in a touch more than 3 years, whereas the company has shareholder equity of $7.2B is not just $1.6B coming due in less than 6 months but also, I do NOT consider $14B - $18B coming due on or before 2011 to be "long-term fixed-rate financing?" Much of the debt is interest only or with minor amortizations. This paragraph would encompass my discussion in my original post where I mentioned, 7. Industry credit tightness, and BAM's high leverage, could cause stress. Noting that $14 - $18B comes due on or before 2011. BAM has $33B of total debt. It seems as though a key thesis for a BAM long has been that the BAM investor thinks BAM has availability of low cost credit and on top of that has current debt that is very manageable because of thinking the debt with BAM and subsidiaries is one of operationally long-term in nature and primarily fixed rate financing. Historically that has been the case with BAM. It is my contention that this alleged long term fixed rate financing with ample liquidity for further leverage or refinancing is no longer as easy as it was. It seems as though much of BAM since the early 2000's and not the Brascan of old, is based on leverage and easy credit. Well what happens if easy credit stays away for longer than a few months or years, or if excess leverage goes away permanently?My original post in this thread addresses what I consider to be real issues.
Updated Thesis.This is a real rough draft for starters. This thesis has evolved slightly since November 2008.(1. ) I think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, could continue to stress BAM. (2.) BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV's start failing to meet capital contribution requirements. (3.) Incestual sales and potentially unusual uses of related parties. These include related party sales. Related party fundings, which include potential below market loans. Related party dividends, which are not necessarily in the best interest of the entity distributing dividends. Potential use of subsidiaries as a funding source, which might not be considered arms-length in nature. Recent items of such could be:A. BHS rights offering $250M, will be used to pay off BAM loan. Speculation is that BAM will backstop nearly entire offering.B. Norbord - In the CC they discussed that the $240M CDN rights offering was essentially fully paid for (at least most of it) by BAM. They took that money and paid back BAM. I forget the amount, but I think in the $90M range (I could be wrong.) They amended their credit line with BAM and brought it down to $50M from $100M. They stated that nothing is currently owed on the line.C. Fraser Papers and Brookfield Paper LLC - Fraser Papers Inc. ("Fraser Papers" or the "Company") (TSX:FPS - News) announced today that it has agreed to sell approximately 10,500 tons of specialty printing, packaging and ground wood papers to Brookfield Paper LLC ("BPLLC") for proceeds of approximately $11.7 million, which will be used to repay amounts outstanding under the Company's working capital facility. In addition, the Company has agreed to supply paper to BPLLC through July 31, 2009, at market prices. The net proceeds to Fraser Papers reflect a customary merchant's discount of 3.5% to end user selling prices. As part of the transaction, Fraser Papers will provide sales and administrative support to BPLLC. BPLLC is a wholly-owned subsidiary of Brookfield Asset Management Inc. ("Brookfield") (TSX:BAM - News; NYSE:BAM - News; AEX:BAMA), the Company's majority shareholderD. Brascan Residential SA has a R$200M Rights Offering - I think, but am not certain that BAM backstopped this. “Rio de Janeiro, January 15, 2009 – Brascan Residential Properties S.A. (“Brascan” – Bovespa: BISA3), one of the largest integrated developers in Brazil, announced today that its Board of Directors has approved a rights issue of 100 million new common shares, within the limits of the authorized capital established by the EGM of November 24th, 2008, providing a capital increase of R$ 200 million.””In addition, one of the controlling shareholders, Brookfield Asset Management, an international asset management firm with approximately US$90 billion under management (of which around US$38 billion is in real estate assets), has committed to subscribe, through Brascan Brasil Ltda, any rights not taken up by the minority shareholders, thereby ensuring full subscription of the R$200 million offering. “This underlines the controlling shareholders’ commitment to the Brazilian real estate business, and their determination to strengthen Brascan’s position as one of the leading companies in the ndustry,” declared Nicholas Reade, Brascan’s CEO.”E. Canary Wharf - On a separate issue BAM indicated to me that the sale of Canary Wharf Group to Brookfield Europe LP with the following: " The sale was by Brookfield Investments Corp., a 100% owned subsidiary. Therefore there is no income recognition on the transaction. " The following is quoted from a SEDAR filing on December 9, 2008 for Brookfield Investments Corporation. "On December 3, 2008, the board of directors of the Company approved the sale of its 15% interest in The Canary Wharf Group plc (“CWG”) to Brookfield Europe LP in exchange for an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000."F. Brookfield Infrastructure Partners - Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)G. Longview and BIP - Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.(4.) Slowdown in Alberta CN real estate. (BPO). I previously had this as potential. Slowdown in Calgary. On 3/3/09 this was in the news, "Canada's Economy Shrinks 3.4%" http://online.wsj.com/article/SB123602303380912541.html(5.) High occupancy rates in metro areas deteriorating because of reliance on financial service industry. Interestingly enough, BPO Properties in recent CC, claimed "business as usual."(6.) Previous access to low cost capital with excess cash based on NAV, no longer available to BAM. (7.) Industry credit tightness, and BAM's high leverage, could cause stress. Noting that $14 - $18B comes due on or before 2011. BAM has $32B of total debt.(8.) Lower values of assets, which were bought at potentially elevated prices, with concerns that loans that are no longer available to such assets. This potential lack of credit is not just industry specific, but what I believe to be company specific. Brookfield Properties has $5.6B of debt coming due on a consolidated level in less than 3 years. Most of this is from Trizec purchase in October 2006, which I think is now US Office Fund.Those are just two items that make up almost $7B in less than 3 years.In total on consolidated basis, BAM has over $14B coming due within three years.Here is what BAM mentioned in their 4Q08 supplemental report in regards to non-recourse commercial property debt."Commercial property financings are secured by high quality office buildings. Many of the financings which mature in the next three years were arranged a number of years ago and, accordingly, represent a low loan to value. As a result, we expect to refinance these maturities in the normal course at the same or a higher level. Maturities in our North American, European and Brazilian operations, are extremely low relative to the scale of these operations, reflecting the long-term nature of the financing. The Australian property market typically utilizes shorter duration financing, which we are rolling over in the normal course and seeking to extend on a long-term basis where possible."From above, not only does BAM expect to be able to refinance, they are expecting to refinance for the same amount of debt or greater. Yet, as JPM said today, it is a new ball game for lending. Cap rates, use of lending guidelines , loan to values have all changed. BAM has alluded long term ownership of assets, when indeed, they have $7B due before 2011 on assets that at the earliest were purchased in October of 2006.If you review BAM and subsidiaries interest coverage ratios they are quite low and have been decreasing over the last few years. In the recent supplemental schedule BAM reported Interest Coverages on Operating Cash Flows, not on Net Income from Operations. When looking at BAM remember to consider asset sales, debenture conversions and so forth, as non-recurring as well as being sold in most cases to related parties. (9.) Funds that BAM manage are not performing within expectations. These include Crystal River, Some Hyperions, Brascan, Multiplex, Brookfield Properties (projected) and Brookfield Homes (projected). Here is an example on Multiplex Funds on 3/2/09On 3/2/09 MULTIPLEX ACUMEN PROPERTY FUND (MPF) closed at $0.03. This has lost 98% of its value since 12/31/07, and 77% of its value since 12/22/08. MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08, $0.20 on 11/24/08 and $0.10 on 12/22/08. On 3/2/09 MULTIPLEX EUROPEAN PROPERTY FUND (MUE)closed at $0.12. This has lost 87% of its value since 12/31/07, and 30% of its value since 12/22/08.MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08, $0.20 on 11/24/08 and $0.17 on 12/22/08. Here are some notes I had on potential debt breaches.Brookfield’s Multiplex Acumen Fund May Breach Debt Agreements Dec. 17 (Bloomberg) -- Multiplex Acumen Property Fund, a A$342 million ($238 million) money manager controlled by Brookfield Asset Management Inc.’s Australian unit, said sliding property values may force it to breach debt covenants on Dec. 31. The fund started its yearly review with lenders and would have 90 days to rectify any breach, Multiplex Acumen said today in a statement to the Australian stock exchange. “The deterioration in the asset value of a number of the fund’s underlying investments, together with a sector-wide reduction in distribution income, is expected to have a negative impact on the net tangible assets,” Multiplex Acumen said. Brookfield, the Toronto-based manager of $90 billion in assets including real estate, paid A$5.7 billion last year to acquire Multiplex Group. Brookfield last month said it agreed to refinance $800 million of Australia-related debt. Credit Suisse, a long time bull on BAM commented the following on 12/17/08.A. Potential breach of covenants is a minor near-term negative for BAM. CS does not believe that BAM has significant exposure to the fund.B. The poor market performance for the related funds presents "significant restructuring opportunities."C. Concern over potential cash funding needs for some of the funds and concern over BAM's ability to raise new money for asset management because of poor performance.D. Historically CS claims that BAM does well in these funds. I say, historically in depressed economic conditions BAM did not have the excess leverage and pending increases in costs of capital as in the past. (10.) Previous business conditions with wind at tail no longer exist. Closer eye on Corporate responsibility.(11.) I am reviewing a bunch of data. It seems as though their IFRS reporting could be potentially aggressive. They are using discount rates and other DCF techniques. All legal, all subject to interpretation. I only quickly glanced and need to further review, but I think the discount rates could be raised, which in turn would bring down asset values. Higher the cap rate, lower the asset value. Higher the discount rate assumption, lower the asset value.
Tiddman says I create BAM fud , in his last fool post and so many other yahoo posts. I guess that is subjective. Yet, unlike Tiddman, and not subjective at all, I have never welched or reneged on a bet. I clearly won our Countrywide bet, and Tiddman, Foo or Tidd failed to pay that bet. Can one get lower than that? Kind of like Pabrai investing for Tiddman when he makes a bet "Heads I win, tails you lose"Lowest form in the world is a welcher. IMO.Here are my lastes Brookfield Asset Management notes. http://www.rbcpa.com/companies/BAM.htmlJust for the record, I do not believe I create any type of FUD.The fact is that Tiddman has welched on a very clear bet, that he admits I won.
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