Brookfield (TSX:BN) is one of Canada’s best performing financial services stocks. Over the years, it has easily outperformed the TSX Index, thanks to its investments compounding at a rate of 16%. The stock is quite well regarded by value investors, based on its relative cheapness and long-term compounding track record.
However, this year saw a major red flag emerge in Brookfield land:
Defaults
This year, Brookfield funds defaulted on a number of real estate loans. The company is currently in talks with creditors about another loan; if they can’t reach an agreement, Brookfield might default again. In this article, I will explore the topic of Brookfield’s credit defaults and whether they are a major concern for investors.
How large are the defaults?
To assess how significant Brookfield’s defaults are, we need to know how large they are. This can tell us whether they signal trouble for Brookfield’s entire portfolio, or just a few isolated assets.
We know that Brookfield’s first default was on $784 million worth of office building loans.
Later, it defaulted on another $161 million worth of office building loans.
So we’ve got about $945 million worth of defaults here. Another $130 million worth of loans is currently being negotiated by Brookfield and its creditors.
How does this compare to Brookfield’s total assets?
Frankly, like a grain of sand on the beach. Brookfield has $452 billion in assets, and $146 billion in shareholders’ equity. The two defaults are very small as a percentage of Brookfield, whether you’re looking at assets or equity. In fact, less than 1% of Brookfield’s total portfolio is affected. So, if you’re concerned about Brookfield becoming insolvent because of this small handful of defaults, rest easy: it’s not.
Have they affected Brookfield’s credit score?
Having looked at Brookfield’s recent defaults, we now need to ask whether the company’s credit score is being affected. It’s nice to know that the defaults occurred on only a small part of the company’s portfolio, but they could still affect the company’s credit score. Rating agencies take a lot of factors into account when determining a company’s credit score. It’s not out of the question for them to downgrade a company based on a few relatively minor defaults.
Fortunately, that’s not what’s happening. DBRS Morningstar rates Brookfield’s debt at A, the same as in prior periods, and Fitch rates its secured debt at A-, consistent with a lot of Brookfield’s historical ratings at other agencies. There’s not much changing here, so the ratings agencies still seem to think that Brookfield is creditworthy. If lenders take their opinions to heart, then Brookfield will not face a higher cost of capital going forward.
Foolish takeaway
Brookfield stock is not without its issues. Some of the company’s real estate assets are troubled, and it’s defaulting on its loans. It’s not a good outlook. However, credit rating agencies don’t seem to think that BN’s creditworthiness is deteriorating, and the company is still doing deals. On the whole, I would not worry about the small handful of defaults seen this year.
