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

DBRS Limited (DBRS) has today confirmed the AAA Issuer Rating of the Canada Pension Plan Investment Board (CPPIB or the Fund), the federal non-agent Crown corporation responsible for managing the assets of the Canada Pension Plan (CPP or the Plan). The R-1 (high) ratings on the Canadian Short-Term Promissory Notes and U.S. Commercial Paper Notes programs of CPPIB Capital Inc. and the AAA ratings on the Medium Term Notes, Series A and Medium Term Notes, Series B issued by CPPIB Capital Inc. are also confirmed. The trends on all ratings remain Stable. DBRS notes that the ratings on the short-term notes programs and medium-term notes are predicated on the unconditional guarantees provided by the CPPIB on issuances. Furthermore, the strong ratings are primarily reflective of CPPIB’s exclusive legislated mandate to manage CPP assets, its robust liquidity position, its low recourse debt burden and the strong fundamentals of the CPP.

CPPIB generated a 6.3% total portfolio return through the first nine months of F2016. This is on the back of a very strong 18.7% return in F2015, the highest annual return achieved since the Fund’s inception. Strong investment income and sizable net contribution inflows drove net assets to $282.6 billion by December 31, 2015, up from $264.6 billion at fiscal year-end 2015, making it one of Canada’s largest pension fund managers. Recourse debt, which consisted of commercial paper (CP) outstanding and long-term debt, ended Q3 F2016 at $15.2 billion, or 5.1% of adjusted net assets, up from 3.6% just nine months earlier. DBRS notes that in early 2015, the Fund increased the authorized limit of short-term debt issuance to an aggregate principal amount of $15 billion, up from $10 billion. Since then, the majority of new issuance has been, and is expected to continue to be, in the much deeper U.S. CP market. In early 2016, the Fund increased the authorized limit on unsecured debt to an aggregate principal amount of $25 billion outstanding, with up to $15 billion outstanding having a remaining term of less than one year. DBRS expects that recourse leverage may increase over the near term; however, overall recourse debt is expected to remain below 10% of adjusted net assets, which provides considerable room for cyclical fluctuations in asset values.

The Fund’s liquidity position remains sound, with highly liquid assets, as defined by DBRS, of over $32 billion as of February 29, 2016, which is above 1.5 times the Fund’s authorized short-term debt limit and provides considerable financial flexibility. CPPIB revised its investment strategy in F2015, which will result in changes to the Fund’s asset composition in the years ahead in light of relatively robust projected cash inflows and a long investment horizon, which enable CPPIB to absorb greater short-term risk and market volatility relative to its peers.

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), Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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.