DBRS Confirms Public Sector Pension Investment Board at AAA and PSP Capital at AAA and R-1 (high)

DBRS Limited (DBRS) confirmed the Issuer Rating of the Public Sector Pension Investment Board (PSPIB or the Fund) at AAA. DBRS also confirmed the ratings of the notes (collectively, the Notes) issued by PSP Capital Inc. (PSP Capital) as follows:

-- Medium-Term Notes at AAA
-- Canadian Short-Term Promissory Notes at R-1 (high)
-- U.S. Commercial Paper Notes at R-1 (high)

All trends are Stable.

The ratings on the Notes are based on the unconditional and irrevocable guarantee provided by PSPIB. Furthermore, all the ratings are supported by PSPIB’s exclusive mandate to manage the assets of four depository pension plans, the role of the Government of Canada (rated AAA with a Stable trend by DBRS) as sponsor of the plans, the high level of assets available to meet obligations, the strong liquidity position of PSPIB and a record of strong investment returns.

PSPIB achieved a net investment return of 12.8% for the year ended March 31, 2017, exceeding its benchmark (BM) by 90 basis points. Nearly all asset classes exceeded their respective BMs, with notable outperformance in private debt, natural resources and infrastructure. Positive investment return and ongoing pension contributions led to an $18.8 billion increase in net assets, which rose to $135.6 billion as at March 31, 2017. Debt with recourse to the Fund rose by $2.2 billion to $11.5 billion, or 7.8% as a share of adjusted net assets.

Subsequent to fiscal year end, the outstanding amount of commercial paper (CP) has fallen and $2.25 billion in medium-term notes have been issued (Series 10 and the reopening of Series 5), resulting in an increase in the recourse debt-to-net assets ratio. DBRS expects PSP Capital to continue to increasingly refinance maturing debt with term note issuance to balance out the amount of outstanding CP and term notes. PSPIB has indicated that it will maintain recourse debt below the 10% internal limit, which is commensurate with its rating. DBRS notes that in August 2017, the Fund combined the individual limits of $3.0 billion for its Canadian borrowing program and USD 5.0 billion for its U.S. borrowing program into one global $12.0 billion limit.

The Fund has a prudent approach to liquidity management and has ample sources of funding to draw upon. DBRS notes that the Fund meets the DBRS criteria for CP liquidity support, as outlined in the appendix to the “Rating Canadian Public Pension Funds & Related Exclusive Asset Managers” methodology entitled “Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers’ Commercial Paper Programs.” 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, which is consistent with DBRS’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility. The Fund also receives semi-monthly fund transfers from the Government of Canada, which the Chief Actuary of Canada estimates will remain positive for at least five years.

Over the next decade, the Fund is expected to surpass the $200 billion mark on the strength of investment returns and net contributions. The Fund has indicated that it will continue to increase its allocations to private markets to better match the risk/return profile of the portfolio with the long-term, inflation-sensitive nature of the pension obligations. With rising assets under management, the Fund will also seek to improve its geographic diversification.

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 and Structured Finance Flow-Through Ratings, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.