Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'A-' to Brookfield Finance II Inc. (Brookfield Finance), a wholly owned debt-issuing subsidiary of Brookfield Corporation. (Brookfield; IDR A-/Stable).

The Rating Outlook is Stable.

Concurrently, Fitch has assigned an expected unsecured debt rating of 'A-(EXP)' to Brookfield Finance's proposed debt issuance. Proceeds are expected to be used for general corporate purposes, which could include the repayment of debt.

Key Rating Drivers

The Long-Term IDR assigned to Brookfield Finance is equalized with that of Brookfield, as all debt issued by the entity benefits from a corporate guarantee from the parent.

The expected rating on the proposed unsecured debt is equalized with Brookfield Finance's Long-Term IDR, reflecting the guarantee from Brookfield. Brookfield's unsecured debt rating, in turn, is supported by the firm's fully unsecured funding position and expectations for average recovery prospects in a stress scenario.

Brookfield's ratings reflect its strong competitive position as a global alternative investment manager (IM), solid investment track record, significant fee-bearing assets under management (FAUM), strong operating margins, distribution-generating capacity from listed affiliates, low leverage on a balance sheet basis, strong funding flexibility and a solid liquidity profile.

Rating constraints specific to Brookfield include above-average exposure to management fees charged on the basis of net asset value, relatively high leverage and low interest coverage on a fee-related EBITDA (FEBITDA) basis, a large balance sheet, which exposes the capital base to potential valuation declines, and a more complex organizational structure, given the ownership stakes in listed affiliates, Brookfield Asset Management Reinsurance Partners Ltd. and Brookfield Property Partners L.P.

Brookfield's balance sheet leverage, as measured by gross debt to tangible equity on a deconsolidated basis (including 50% of the preferred shares and subordinated debt as debt), was 0.31x at Sept. 30, 2022. Balance sheet leverage is not expected to change meaningfully for the incremental debt issuance. Balance sheet leverage of this magnitude is at the low end of the peer group and relatively low on an absolute basis. While Brookfield's balance sheet assets are subject to write-down, Fitch believes the capital base provides a strong cushion to absorb potential losses from valuation changes.

On a cash flow basis (gross debt-to-FEBITDA), Brookfield's leverage was 7.7x on a TTM basis through 3Q22, or 3.1x when including listed affiliate distributions, which is above the peer average but within Fitch's 'bbb' category quantitative capitalization and leverage benchmark range for alternative IMs of 2.5x-4.0x. Cash flow leverage would increase modestly with the contemplated issuance but will remain within Fitch's 'bbb' category benchmark range. Fitch recognizes that cash flow leverage would be lower if realized carry, incentive income and performance fees were included in the calculation.

When assessing Brookfield's leverage, Fitch takes a hybrid approach, allocating a portion of the debt to the balance sheet business (up to a maximum of 0.35x on a gross debt to equity basis) and a portion of the debt to the fee generating business (up to 2.5x on a gross debt to FEBITDA basis), consistent with the higher end of Fitch's 'a' quantitative capitalization and leverage benchmark ranges for both metrics. On this basis, Fitch views Brookfield's leverage profile as commensurate with the current rating level. While the 25% spin-off of the asset management business will initially have a negative impact on leverage, Fitch believes cash flow and balance sheet leverage metrics will return to historical ranges relatively quickly with planned FAUM expansion.

The Stable Rating Outlook reflects Fitch's expectations that management will continue to generate stable management fees and distributions, maintain strong operating margins, retain FAUM through the raising of new and expansion of existing funds, return leverage metrics to current levels shortly after the spin-off, and retain a solid liquidity profile in order to fund operations and capitalize on investment opportunities.

RATING SENSITIVITIES

The Long-Term IDR at Brookfield Finance is equalized with Brookfield's IDR and would be expected to move in tandem.

The expected unsecured debt rating is equalized with the Long-Term IDR and would be expected to move in tandem. A meaningful increase in the amount of secured funding in the capital structure could result in the unsecured rating being notched down from the IDR.

Factors that could, individually or collectively, lead to positive rating action/upgrade include a decline in balance sheet and/or cash flow leverage, such that these metrics approach 0.25x and 1.50x, respectively, under Fitch's hybrid leverage analysis, an improvement in interest coverage on a FEBITDA-only basis approaching or above 4.0x, a reduction in balance sheet risk, increased carried interest-generating capacity with demonstrated stability through a variety of market cycles, and enhancement of the liquidity profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade include material changes in leverage and/or interest coverage following the partial spin-off of the asset management business or resulting from a material degradation of balance sheet assets and/or weaker investment performance which adversely impacts the firm's ability to generate FEBITDA or support listed affiliate distributions. More specifically, increases in balance sheet and/or cash flow leverage, such that these metrics approach 0.40x and 3.0x, respectively, under Fitch's hybrid leverage analysis, could negatively affect ratings. A narrowing of the firm's product set, a key person or reputational event that challenges fundraising and FAUM growth and/or an impairment of the liquidity profile as it relates to operating needs, debt maturities, and co-investment commitments could also yield negative rating momentum.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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