DBRS Limited Concludes Comment Period for Self-Liquidity Appendix in Canadian Public Pension Funds Methodology

On July 14, 2016, DBRS Limited (DBRS) published a request for comments on a proposed new appendix entitled “Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers’ Commercial Paper Programs” (the New Criteria) to be added to the existing methodology entitled “Rating Canadian Public Pension Funds and Related Exclusive Asset Managers.”

The comment period ended on August 13, 2016. DBRS received comments from various parties, all of whom wished to have their names withheld. As a result of certain comments, DBRS has amended the methodology and discusses three comments below in more detail.

(1) “Other” Publicly Traded Debt Securities
A comment was made that the 50% discount applied to “other publicly traded debt securities (net of any repos) rated at least investment grade” was too conservative, especially at higher rating categories, and lower discounts were suggested. DBRS has responded that in setting these discount rates (and this applies to item (2) as well), DBRS aims to strike a balance between (a) simplicity of the formula and (b) recognition of the value of marketable securities under worst case stressed scenarios at a degree of conservatism appropriate for a highly rated Canadian public pension fund. In order to provide additional granularity, while still reflecting an appropriate degree of conservatism, DBRS has added an additional asset category “other publicly traded debt securities (net of any repos) rated at least AA (low) or R-1 (middle),” which will be discounted at 33%. DBRS has also clarified that structured finance debt instruments are excluded from “other publicly traded debt securities” at all rating levels.

(2) Equities
A comment was made that the 75% discount to equities was too conservative, and lower discounts were suggested. As noted above, DBRS aims to strike a balance between simplicity and conservatism. Accordingly, DBRS has maintained its discount of 75% for “public equities from major stock exchanges” but adds footnote 3 for added clarification as to which exchanges can be included in this asset category, as suggested by several commentators.

(3) Outstanding CP vs. Program Limit of CP
A comment was made that the discounted assets of the second minimum asset criteria should be measured against the outstanding amount of commercial paper, not the total authorized amount of commercial paper. DBRS has responded (and added this point to the methodology) that the second minimum asset test “considers the stressed value of certain marketable securities against the total authorized amount of the CP program as one component of an assessment of the Canadian public pension fund’s longer-term liquidity.” So while the test does include undrawn but authorized amounts of commercial paper, it does not include other liabilities, which in the longer term may equally be a drain on liquidity.

The New Criteria provides certain Canadian public pension fund and related exclusive asset managers with another option for providing CP liquidity support, in addition to the options outlined in the methodology “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” published on April 15, 2016 (the Non-Bank CP Criteria). The New Criteria is intended to replace the criterion of 1.5x coverage of the maximum authorized CP program limit by so-called highly liquid assets (the Current Criteria) as defined in the appendix on page six of the Non-Bank Criteria.

The New Criteria is effective as of today. Since several issuers currently provide liquidity support in accordance with the Current Criteria, and a prior review of the issuers is to be conducted by DBRS before the issuers can elect the self-liquidity option in the New Criteria, the Current Criteria will also remain effective until January 31, 2017, to provide sufficient time for issuers to elect to use and meet the New Criteria. On January 31, 2017, the Current Criteria will be discontinued and archived.

DBRS also clarifies that the other CP liquidity support options listed in the main body of the Non-Bank Criteria are still available to be used by pension funds as alternatives to complying with the New Criteria.

DBRS expects that, subject to the prior review outlined in the New Criteria, the Canadian public pension fund and related exclusive asset manager issuers currently rated will be able to satisfy the New Criteria and may elect to take this self-liquidity option.

DBRS deems the changes to be material; however, no rating changes are expected to occur subsequent to the January 31, 2017, date.

DBRS rating definitions and the terms for use of such ratings are available at www.dbrs.com.

DBRS’s methodologies and criteria are available at www.dbrs.com or by contacting info@dbrs.com.