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S&P downgrades Brookfield Asset outlook

Brookfield Asset Management Inc.'s credit outlook was downgraded to "negative" Tuesday by Standard & Poor's, as the rating agency warned that weakness at two key subsidiaries could hit the company's future profits.

Credit analyst Greg Pau said subsidiaries Brookfield Properties and Brookfield Renewable Power face operating cash flow volatility, lower investment gains and challenging market conditions that could require the parent company to intervene.

"We believe that the deterioration in Brookfield's financial risk profile reflects more the result of a cyclical downturn and expect improvements when the market conditions recover, although there is limited visibility in the timing of such improvements," he said as he downgraded his outlook to "negative" from "stable."

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The company's single-A-minus long-term corporate credit rating was reaffirmed.

Mr. Pau said valuation declines on Brookfield Properties' commercial portfolio, coupled with stricter lender underwriting, could make it difficult for the subsidiary to refinance $1.6-billion (U.S.) of debt maturing in 2011 in the United States.

"Standard & Poor's expects that the likelihood that some of its subsidiaries, in particular its U.S. real estate fund, could require assistance to support their refinancing and debt servicing needs has increased under the current challenging credit market environment," Mr. Pau said.

Meanwhile, he is "concerned" that lower spot power prices could reduce free cash flow and weaken interest coverage at Brookfield Renewable Power, which will collect 40 per cent of its revenue after 2010 in the spot market and with short-term contracts.

On Monday, Great Great Lakes Hydro Income Fund said it would pay $815-million for Brookfield Renewable Power's Canadian power operations. Great Lakes will purchased 15 hydroelectric facilities and one wind farm and issue $380-million subscription receipts to help for the deal.

Brookfield will end up with half of the receipts, and maintain a 50.01 per cent stake in a newly named Brookfield Renewable Power Fund.

Brookfield Asset Management reports its second quarter profit on Aug. 7. First quarter profit fell by more than half to $93-million from $197-million in the year-earlier period.

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