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

DBRS Limited (DBRS) has confirmed the Issuer Rating of the Public Sector Pension Investment Board (PSPIB or the Fund) at AAA, along with the outstanding Medium-Term Notes and Short-Term Promissory Notes issued by PSP Capital Inc. (PSP Capital) at AAA and R-1 (high), respectively, all with Stable trends. The ratings are supported by PSPIB’s exclusive mandate to manage the assets of the four depositor pension plans, the role of the Government of Canada as the sponsor of these plans, the high level of assets available to meet potential guaranteed obligations, a strong liquidity position and a track record of superior investment performance.

PSPIB generated a 16.3% total investment return in fiscal 2014, exceeding the benchmark by 240 basis points. Over a longer ten-year period, the Fund has surpassed the benchmark return and delivered investment returns in excess of the long-term required rate of return. All investment mandates posted positive returns in fiscal 2014, with notable outperformance seen in the private market asset classes. The solid investment performance and continued sizable net contributions led to a $17.6 billion increase in net assets, which rose to $93.7 billion as at March 31, 2014, and have grown nearly three-fold since the financial crisis. At fiscal YE2014, debt with recourse to the Fund rose by $1.4 billion to $6.8 billion, or 6.8% of adjusted net assets, owing to higher commercial paper (CP) outstanding and term note issuance.

Subsequent to fiscal year-end, PSP Capital issued a combined $700 million in floating-rate notes and medium-term notes in April 2014 to repay maturing CP. As such, DBRS estimates that as of June 30, 2014, PSPIB’s recourse debt burden declined slightly to 6.5% of adjusted net assets, further supported by continued growth in net assets. DBRS expects PSP Capital to scale back its Canadian CP program while increasing the usage of the U.S. CP program, which combined additional term notes issuance will likely drive recourse debt higher by fiscal YE2015. Despite this projected increase, PSPIB intends to keep recourse leverage below its internal threshold of 10% of adjusted net assets, which is viewed by DBRS as prudent and provides resilience to the credit profile. Furthermore, the Fund’s liquidity position remains robust with $15.3 billion of highly liquid assets, as defined by DBRS, at October 31, 2014, which further highlights PSPIB’s substantial financial flexibility. The Fund continues to adhere to DBRS’s liquidity requirement for pension plans. DBRS notes that PSPIB has no direct responsibility for the obligations faced by the depositors in relation to the benefits owed to their members, which greatly reduces the volatility of PSPIB’s net asset position.

PSPIB targets an asset mix strategy of 42% private market assets and 58% public market assets, though progress toward this target has been slow. PSPIB believes that the greater exposure to private market assets is more suitable to the inflation-sensitive nature of the long-term liabilities of the depositor plans and allows it to take advantage of its robust net cash inflows, which are expected to stay positive until approximately 2030. As assets under management have grown, PSPIB has made investments to improve its internal systems in order to bolster its risk management capabilities and enhance investment monitoring and risk reporting. DBRS notes that PSPIB adopted a formal Risk Appetite Statement in fiscal 2014, which spells out management and board understanding of key operational risks and seeks to bolster the risk culture across the organization.

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.

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

The applicable methodologies are DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013) and Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (May 2014), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.