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

DBRS Limited (DBRS) 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). DBRS also confirmed 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. and the AAA ratings on the Medium-Term Notes issued by CPPIB Capital Inc. All trends remain Stable. DBRS notes that the ratings on the short-term notes programs and long-term notes are predicated on the unconditional guarantees provided by CPPIB on issuances. Furthermore, the strong ratings are primarily reflective of CPPIB’s exclusive legislated mandate to manage CPP assets (including the legislative protection entitling the Fund to maintain an amount at least equal to the fair market value of CPPIB’s assets less its liabilities at any given time), its robust liquidity position, its low recourse debt burden and the strong fundamentals of the CPP.

CPPIB generated a strong 11.6% net return in F2018 and outperformed the reference portfolio’s return of 9.8% by 1.8%. Strong investment income and sizable net contribution inflows boosted net assets to $356.1 billion by March 31, 2018, up from $316.7 billion at fiscal year-end (YE) 2017, making it one of Canada’s largest pension fund managers. Recourse debt, consisting of commercial paper (CP) outstanding and long-term debt, ended F2018 at $24.1 billion, or 6.3% of adjusted net assets, up from 5.9% as at fiscal YE2017. Subsequent to fiscal year-end, the Fund issued its inaugural Green Bond issuance of $1.5 billion in June 2018, maturing in June 2028, to fund investments in renewable energy, sustainable water and wastewater management and green buildings. In the second half of 2017, the Fund increased the authorized limit on unsecured debt to an aggregate principal amount of $30 billion outstanding, while maintaining the $15 billion limit on outstanding unsecured debt with 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, providing considerable room for cyclical fluctuations in asset values.

DBRS notes that the Fund meets DBRS criteria for CP liquidity support 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, consistent with DBRS’s policy on back-up liquidity support for pension plans and provides considerable short-term financial flexibility.

DBRS notes that in F2018, CPPIB established a new role of Chief Financial and Risk Officer (CFRO) and filled the position in July 2017 after the previous Chief Financial Officer retired. The CFRO reports to both the CEO and the Board and includes the responsibility of oversight of enterprise-wide risk management.

Starting in January 2019, the Fund will start receiving additional net contributions relating to the additional CPP. Although all assets will be held by the Fund, the contributions, benefits and assets for the additional CPP will be accounted for separately from the base CPP. The Fund has determined its investment strategy for the additional CPP assets and is in the process of preparing to receive the additional contributions.

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 under Related Documents 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.

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