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

DBRS has today confirmed the Issuer Rating of AAA on the Canada Pension Plan Investment Board (CPPIB or the Fund), the non-agent federal Crown corporation responsible for managing the assets of the Canada Pension Plan (CPP). The rating on the Short-Term Promissory Notes programs of CPPIB Capital Inc., the financing subsidiary whose short-term debt programs are unconditionally guaranteed by the Fund, is also confirmed, at R-1 (high). The trends on both ratings remain Stable as net assets far exceed recourse debt and the Fund’s fundamentals remain strong. According to the most recent Chief Actuary of Canada’s report released in December 2013, the CPP, as constituted, is financially sustainable over the 75-year projection period, and CPP contributions are expected to exceed annual benefits paid over the period of 2013 through 2022.

Over the first nine months of F2014, the Fund generated a total invetment return of 8.9%. This helped boost net assets to $201.5 billion by December 31, 2013, up 9.9% from the $183.3 billion recorded at the end of F2013. Highly liquid assets, as defined by DBRS, stood at over $31 billion as February 28, 2014, and well above 1.5 times the Fund’s $10 billion commercial paper (CP) limit mandated by DBRS’s back-up liquidity requirement, providing ample financial flexibility. Recourse debt, consisting entirely of CP outstanding, rose to $9.5 billion, or 4.9% of adjusted net assets by March 31, 2013, up notably from just 1.5% in the prior year, as issuance was ramped up primarily through the new U.S. dollar CP program. The Q3 F2014 results show that CP outstanding continues to push up against the $10 billion CP program limit. DBRS expects that recourse leverage will rise steadily in the years ahead but remain well below 10% of adjusted net assets, leaving considerable room for cyclical fluctuations in asset values.

Illiquid assets continue to be a key focus of the CPPIB’s investment approach, as these investments, which stood at 38.2% of Fund assets in F2013, are seen to add sufficient returns over long periods that justify their added costs and complexity. CPPIB has embarked on a global active management strategy, whereby investments will increasingly be sourced internationally. At the end of F2013, 63.3% of net assets were invested internationally, and it is expected that this allocation will increase as the Fund seeks to capitalize on long-term growth opportunities in the global economy. This active management approach entails an elevated degree of risk relative to a more passive mandate, as such investments made to develop a more robust risk management framework and culture, and enhance internal systems to monitor, measure and report risk exposures, lend further support to the credit profile.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.