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No. of Recommendations: 2
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 shareholder

D. 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%"

(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 3/2/09

On 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.
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