DBRS Finalizes Provisional Rating of AAA on CPPIB Capital Inc.’s EUR Series 3 Fixed Rate Notes and Confirms CPPIB at AAA and CPPIB Capital Inc. at AAA and R-1 (high)

DBRS Limited (DBRS) has today finalized the provisional rating of AAA with a Stable trend on the euro-denominated Series 3 Fixed Rate Notes (the Series 3 Notes) issued by CPPIB Capital Inc. (CPPIB Capital). The EUR 2.0 billion Series 3 Notes have a coupon rate of 0.375% and a maturity date of June 20, 2024. CPPIB Capital is a wholly owned subsidiary and principal funding vehicle of Canada Pension Plan Investment Board (CPPIB or the Fund; rated AAA with a Stable trend by DBRS). The Series 3 Notes are unconditionally and irrevocably guaranteed by CPPIB and rank pari passu with all other present and future unsecured and unsubordinated indebtedness of CPPIB Capital.

Additionally, following the release of CPPIB’s 2017 annual report in May, DBRS has today confirmed the AAA Issuer Rating of CPPIB, the federal non-agent Crown corporation responsible for managing the assets of the Canada Pension Plan (CPP or the Plan), which operates independently from the government. Also confirmed are CPPIB Capital’s R-1 (high) ratings on their Canadian Short-Term Promissory Notes, U.S. Commercial Paper Notes and Euro Commercial Paper Notes programs, as well as the AAA ratings on their 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. 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 net return of 11.8% in F2017, higher than the net return of 3.4% in F2016, but below the reference portfolio’s return of 14.9%. The underperformance was mainly due to (1) the broader diversification of the investment portfolio, compared to the public equity-dominated reference portfolio in a year where global public equity markets had strong performance; and (2) the nature of the valuation process for private investments that tends to lag behind the prices of comparable public market equivalents. Strong investment income and sizable net contribution inflows boosted net assets to $316.7 billion by March 31, 2017, 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 F2017 at $19.9 billion, or 5.9% of adjusted net assets, up from 5.3% in the previous year. 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 principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (May 2017) and Structured Finance Flow-Through Ratings (January 2017), which can be found on dbrs.com under Methodologies.

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

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