Brookfield Corp. relies on war chest of capital as high interest rates put squeeze on available credit
With a rapid rise in interest rates creating a crunch in credit markets, Brookfield Corp. is looking to turn its large war chest of capital and continuing clout in financing deals to its advantage.
Brookfield has US$113-billion of liquid capital available to put into new investments across its group of subsidiaries, including US$33-billion of cash, financial assets and undrawn credit lines, as of March 31. That is backed by a balance sheet with US$135-billion of mostly liquid assets that have only US$12-billion of debt borrowed against them.
At the same time, Brookfield has shown it still has the ability to tap into financing, even as interest rates drive up borrowing costs and some financial institutions pull back on lending. Brookfield closed more than US$20-billion of financings across its operations “over the last several weeks,” including some that held the interest rate it pays constant or lower in spite of the volatility in markets.
“Capital markets are still open to those with strong balance sheets, high-quality assets and longstanding relationships,” said chief executive officer Bruce Flatt, in a letter to shareholders on Thursday.
As more companies feel the pinch from more expensive lending that is in shorter supply, Brookfield believes its “continued access to equity and debt financing will be a significant competitive advantage,” he said.
Among the examples he cited was a £650-million ($1.1-billion) refinancing of a hospitality asset in the United Kingdom in April. The financing was heavily oversubscribed and resulted in a lower interest rate of 6 per cent for Brookfield, down from 7.2 per cent previously, in spite of the higher interest-rate environment.
Brookfield Corp. reported first-quarter profits of US$424-million, or 5 US cents per share, compared with US$2.96-billion, or 81 US cents per share, in the same quarter last year. The gap in earnings is partly a result of the spin-off of its asset management business, Brookfield Asset Management Ltd., as a stand-alone public entity last December.
Distributable earnings from the quarter – which show the proportion of profits that could be paid out to shareholders – were US$1.16-billion, or 72 US cents per share, compared with US$1.18-billion, or 73 US cents per share, a year earlier. For the full year, distributable earnings before realizations were up 24 per cent to $2.66-billion, adjusting for the distribution of 25 per cent of Brookfield Asset Management late last year.
Last year, Brookfield Corp. returned US$404-million to shareholders through dividends and share repurchases, and plans to continue buying back shares this year.
Brookfield’s unrealized carried interest – its share of profits from some successful investments – rose 2 per cent to US$9.4-billion in the quarter. Over the last year, the company realized US$633-million of carried interest, and expects to realize another US$500-million this year.
In his letter to shareholders, Mr. Flatt sought to calm growing fears over commercial real estate, reiterating Brookfield’s view that the real estate market is splitting into “a tale of two cities,” divided between high- and low-quality properties. And he stressed that interest costs on many properties have not surged as much as it seems.
“The rates coming due on mortgages are in many cases similar to those that are expiring,” he said.
He also emphasized that a large share of Brookfield’s potential over the coming years arises from businesses that it built on top of its original core operations in private equity and real estate of the last decade. A significant share of the company’s growth now comes from infrastructure, renewable power and climate transition investments, and private credit.
As the world moves to decarbonize, Brookfield has positioned itself as one of the largest investors in renewable energy sources, deploying about 85 per cent of its first US$15-billion global transition fund, and now starting to raise money for a second fund it expects will be larger.
“We have room to grow for decades ahead,” Mr. Flatt said in his letter. “This business did not exist five years ago, and now it has the potential to be one of our largest businesses as the world continues to grasp how to fund the transition to less carbon.”