DBRS Confirms CPPIB at AAA and CPPIB Capital Inc. at AAA, 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). Also confirmed are the R-1 (high) ratings on the Canadian Short-Term Promissory Notes, U.S. Commercial Paper Notes and Euro Commercial Paper Notes programs of CPPIB Capital Inc., as well as the AAA ratings on the Medium Term Notes, Series A; Medium Term Notes, Series B; Medium Term Notes, Series C; Series 1 Fixed Rate Notes; and Series 2 Fixed Rate Notes issued by CPPIB Capital Inc. 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 3.4% net return in F2016, outperforming the reference portfolio return by 4.4%. Additionally, the Fund generated a 6.9% net return through the first nine months of F2017. Strong investment income and sizable net contribution inflows boosted net assets to $298.1 billion by December 31, 2016, up from $278.9 billion at fiscal year-end 2016, 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 F2017 at $17.4 billion, or 5.5% of adjusted net assets, up slightly from 5.3% just nine months earlier. DBRS notes that 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 sufficient same-day available funds equal to at least five business days of upcoming liabilities and discounted assets equal to the remaining maximum authorized CP program limit, consistent with DBRS’s policy on back-up liquidity support for pension plans, and provides considerable short-term financial flexibility. CPPIB continues to implement its investment strategy which was revised in F2015 and 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 (November 2016) and Structured Finance Flow-Through Ratings (January 2017), 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.

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