DBRS Confirms PSPIB and PSP Capital Inc. at AAA and R-1 (high)

DBRS has today confirmed the Issuer Rating of Public Sector Pension Investment Board (PSPIB or the Fund) at AAA, with a Stable trend. The Short-Term Promissory Notes and Medium-Term Notes issued by PSP Capital Inc. and guaranteed by PSPIB, are also confirmed at R-1(high) and AAA, respectively, with Stable trends. The financial trajectory of PSPIB remains sound, as it continues to benefit from its large base of unencumbered assets, robust liquidity position, solid cash flow outlook and modest level of recourse debt.

PSPIB delivered total portfolio returns of 3.0% in fiscal 2012, exceeding the benchmark by 140 basis points, amidst the most challenging investment climate since the 2008–09 market downturn. A majority of the portfolio’s asset classes outperformed their benchmarks with solid results from fixed income and private markets assets, which recorded returns ranging 2.7% to 15.3%. The Fund’s public equities portfolio posted mixed results, falling by 3.4% collectively, as euro zone concerns, slowing growth in key emerging market economies and declining commodity prices drove many global market indexes lower during the year, though some equity mandates, namely U.S. large cap and small cap developed world equities, posted solid returns. The infrastructure portfolio posted a modest 2.7% return, though this lagged the benchmark by 690 basis points, due to its exposure to the sagging natural gas sector.

A combination of investment gains and sizeable net contributions from depositors helped boost the Fund’s net asset position by 11.2% to $64.5 billion by fiscal year-end 2012. As expected, PSPIB issued medium-term notes during the year, increasing recourse leverage to $4.4 billion, or 6.3% of adjusted net assets at March 31, 2012. Leverage continues to be below the Fund’s internal debt limit of 7.5% of adjusted net assets. DBRS expects recourse debt to continue to climb in the medium term, as the Fund expands its activities in the private market asset classes, though it is expected to remain at a level that is manageable for the current rating, and consistent with other large DBRS-rated pension fund managers. Additionally, the Fund maintains a robust liquidity position, at a level consistent with DBRS’s liquidity requirement, which further highlights PSPIB’s substantial financial flexibility.

PSPIB has embarked on a strategy to continue to boost the proportion of assets managed internally, which stood at 74% of total assets by March 31, 2012. PSPIB believes such an approach offers cost efficiencies, provides better control over investment risk and greater influence over major investment decisions. The Fund employs robust risk and liquidity management practices, and continues to adjust these to align with changing market conditions.

In the nine years since it began its diversification strategy, the Fund has delivered results exceeding its long-term required rate of return. In fiscal 2012, PSPIB began implementing its revised policy portfolio, which calls for reduced public equities allocation and increased exposure to private market assets, with the latter eventually set to climb to over 40% of the portfolio. DBRS expects that the Fund’s drive to further boost private market allocation will help to enhance risk-adjusted returns and diversification, and will ultimately soften downward pressure in unsettled markets, while providing additional uplift in buoyant markets. This will be further supported by the Fund’s positive net cash inflows, which are expected to remain positive over the next 15 years, and afford sufficient liquidity and flexibility to diversify into less-liquid asset classes and maintain a long-term investment horizon.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (May 2012), which can be found on our website under Methodologies.