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 of 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 9.8% for the year ended March 31, 2018, exceeding its benchmark (BM) by 110 basis points. Nearly all asset classes exceeded their respective BMs, with notable outperformance in private debt, natural resources and infrastructure. The Complementary Portfolio, which was added in F2017 and includes investments that do not fit within an existing asset class but support the total fund investment approach, outperformed the benchmark by 24.3%. Positive investment return and ongoing pension contributions led to an $17.4 billion increase in net assets, which rose to $153.0 billion as at March 31, 2018.

Debt with recourse to the Fund rose by $1.4 billion to $13.0 billion, or 7.9% as a share of adjusted net assets as at March 31, 2018, compared with 7.8% as at March 31, 2017. Subsequent to fiscal year end, $1.25 billion in medium-term notes (MTNs) have been issued (Series 11). 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. PSP Capital also aims to launch a global MTN program in F2020. PSPIB’s recourse debt has remained below the 10% board limit, providing considerable room for cyclical fluctuations in asset values.

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 commercial paper (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 Self-Liquidity Criteria). 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’s net assets under management are expected to surpass the $250 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 also continues to seek to improve its geographic diversification.

DBRS notes that in February 2018, the Board appointed a new President and Chief Executive Officer of the Fund, Neil Cunningham, who has been with PSPIB since 2004 and previously acted as Senior Vice President and Global Head of Real Estate and Natural Resources. In July 2018, Eduard van Gelderen was appointed as Chief Investment Officer, and will lead the Total Fund Strategy Group with oversight of multi-asset class investment strategies and total fund allocations and exposures.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 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 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 Documents below or by contacting us at info@dbrs.com.