‘The recovery is here:’ Brookfield is ready for rates to rise

Brookfield Asset Management Inc. (BAM) doesn’t need interest rates to stay lower for longer. In fact, CEO Bruce Flatt wouldn’t mind seeing them go up more than a little bit.

“Rising interest rates? That would be great, if we could get interest rates from 1 per cent to 3 per cent,” Mr. Flatt said in an interview with The Globe and Mail. “That would be really great for the world, because it means things are coming back.”

Mr. Flatt is not an economist, and it is not simply an academic question for Brookfield. The Toronto colossus has roughly US$575-billion in assets, and it uses debt to help make its investments in real estate, infrastructure and energy. The economic tumult of 2020 has made borrowings, and the amount Brookfield pays for them, central to the dialogue about the company.

As the COVID-19 pandemic erupted, the economy crumbled and markets tumbled in March, investors feared for every company that had debt on its balance sheet. Mr. Flatt’s message was that Brookfield had reasonable levels of borrowings at the parent-company level (US$7-billion, versus a market cap that was around US$50-billion), significant undrawn lines of credit, and plenty of assets to sell if things got really, really bad. Then, as equity markets quickly rebounded, Mr. Flatt turned to emphasizing the power of rock-bottom interest rates in goosing the company’s cash flow.

Mr. Flatt said a lot of that work has been accomplished, with new corporate-level debt financings floated for 60 to 80 year durations, and real-estate mortgages locked in at half the interest rates Brookfield had planned for.

“What’s amazing today is that we are rolling over financings and fixing them for 25 years at rates which you could have never imagined before. We put a US$1.8-billion mortgage on one [New York City] building, and when we started the building, in the models we ran a 5.5-per-cent mortgage – but we financed it at 2.75 per cent. You could do the math. … It’s enormous amounts of money to the owner.” (The math on a US$1.8-billion borrowing is, in fact, a US$50-million per year savings in year one, and more than US$800-million over 25 years.)

People used to think of the normal level interest rates at 8 per cent, Mr. Flatt notes, and have had to adjust their thinking all the way down to the current rock-bottom levels. Now, with the Bank of Canada’s key overnight lending rate at a record-low 0.25 per cent and its global peers in similar territory, “rising interest rates” mean a significant jump, but to a level that used to be considered historically low.

As it happens, Mr. Flatt has a colleague with some experience in the matter: Mark Carney, former head of the Bank of Canada and the Bank of England, has chosen Brookfield for his re-entry to the…