DBRS Confirms Cadillac Fairview Finance Trust at AAA

DBRS Limited (DBRS) has today confirmed the ratings on the Series A, B, and C Debentures (the Debentures) of Cadillac Fairview Finance Trust (CFFT) at AAA, all with Stable trends. The ratings are based on the unconditional and irrevocable guarantees provided by Ontario Teachers’ Pension Plan Board (OTPP or the Fund), which manages the defined-benefit pension plan (the Plan) of Ontario teachers. The ratings are further supported by the Fund’s substantial net asset base, low recourse debt burden, solid liquidity position, strong legislative framework and proven investment track record. As a mature plan, OTPP has endured a lengthy period of pension deficits; however, proactive measures have been taken in recent years to help stem the erosion in the Plan’s funding position.

OTPP delivered an 11.8% total fund return in 2014, beating the benchmark by 170 basis points, aided by a solid rebound in fixed income returns, and generally sound performance across all asset classes with the exception of natural resources. This marks the sixth consecutive year of double-digit investment performance. Net assets rose by 9.7% to $154.5 billion as of December 31, 2014, driven by $16.3 billion in net investment income, though net contribution outflows provided a partial offset. Despite the significant net asset growth, on a financial statement basis, the deficit rose significantly to $18.2 billion in 2014, largely due to a lower discount rate and revised mortality assumptions. However, on a going concern basis, which is seen as a truer representation of the Plan’s long-term viability, OTPP recorded a second consecutive funded surplus, with the most recent preliminary valuation conducted as at January 1, 2015, showing a $6.8 billion surplus.

Debt with recourse to OTPP remained unchanged at $2.6 billion, or 1.7% of adjusted net assets by year-end 2014, the lowest among DBRS-rated pension plans. There is some uncertainty as to whether the upcoming $1.25 billion Series A Debentures maturity in January 2016 will be refinanced. Nevertheless, DBRS expects recourse leverage to remain notably below the 10% internal limit, providing considerable resilience to the financial profile.

The Plan’s demographic profile remains the primary challenge, as the active member-to-pensioner ratio declined further in 2014 to 1.4 times. As a result of this, along with growing net contribution outflows, the Fund has adopted an asset mix strategy that has a relatively larger weighting in fixed income assets and illiquid real assets, namely real estate and infrastructure, as well as private capital with a particular focus on assets that provide adequate asset-liability matching, inflation hedging and the opportunity to yield superior risk-adjusted returns. Given the low interest rate environment, real assets are increasingly being seen as a substitute for bonds thus driving prices higher. As such, prudence will be required to prevent overpaying for these assets.

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 methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (June 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.