Investing.com -- Fitch Ratings has assigned Long-Term Issuer Default Ratings (IDRs) of ’A’ to Brookfield Asset Management Ltd. (TSX: BAM ) and its wholly owned subsidiary, Brookfield Asset Management ULC (Brookfield ULC). The agency has also provided an expected rating of ’A(EXP)’ to BAM’s proposed unsecured debt issuance, which will be used for general corporate purposes. The Rating Outlook is Stable.

Brookfield Corporation, which owns a 73% stake in BAM, retains its ’A-’ rating and Stable Outlook, unaffected by these actions.

The ’A’ rating for BAM is an acknowledgment of its strong position as a global alternative investment manager. The firm’s diverse product line, solid investment track record, significant fee-bearing assets under management (FAUM), strong fee-related EBITDA (FEBITDA) margin, relatively low leverage, and robust liquidity profile contributed to this rating.

However, the rating also takes into account certain constraints specific to BAM. These include a higher exposure to management fees based on net asset value (NAV) compared to peers, limited revenue diversity due to the lack of a meaningful realized carry component for several years, and a relatively high payout ratio, with a target of 90% or more.

Other industry-wide constraints considered include ’key person risk’, reputational risk, and legal, political and regulatory risk. The agency also noted the challenging macroeconomic conditions, such as elevated interest rates and slowing GDP growth, which may affect investment performance and fundraising.

In 2024, BAM recorded strong fundraising trends with $129 billion of FAUM inflows, marking a 17.8% increase from the previous year. The FAUM reached $538.5 billion at the end of 2024. Fitch expects this growth to continue in the near term, with the anticipation of AUM doubling by 2029.

BAM’s FEBITDA margin was 51% in 2024, averaging 51.2% from 2021-2024, which aligns with Fitch’s ’aa’ category earnings and profitability benchmark range of greater than 50% for alternative IMs.

BAM had no long-term borrowings outstanding at the end of 2024. While leverage is expected to increase with the proposed unsecured debt issuance, Fitch anticipates BAM will manage leverage at or below 1.5x on a debt-to-distributable earnings basis over the medium term.

Fitch believes BAM has a solid liquidity profile, given its strong cash earnings, $404 million of cash and equivalents at the end of 2024, and $1.05 billion of borrowing capacity on corporate revolvers.

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.

Negative rating action could result from weaker investment performance that adversely affects the firm’s ability to generate FEBITDA, 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.

Positive rating action could result from 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.

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