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). 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 CPPIB Capital Inc.’s Medium-Term Notes. 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.

In December 2016, the Canada Pension Plan Act (CPP Act), the Canada Pension Plan Investment Board Act (CPPIB Act) and the Income Tax Act were amended to increase the amount of retirement pensions and benefits that will be paid from contributions made after 2018. Starting in January 2019, CPPIB received and invested its first transfer of funds for the additional CPP. Although all assets are held by the Fund, contributions, benefits and assets for the additional CPP will be accounted for separately from the base CPP. Investment returns and benefits from the contributions made at the rates established before 2018 are managed through the base CPP account, while investment returns and benefits stemming from the increased contributions are managed through the additional CPP account.

The total fund earned a net return of 8.9% in F2019, outperforming the reference portfolio’s return of 6.6% by 2.3%. The Fund generated net investment income of $32.0 billion, which, combined with the $3.9 billion in net contributions received, increased the Fund’s assets to $392.0 billion, corresponding to $391.6 billion in base CPP and $0.4 billion in additional CPP.

Recourse debt, consisting of commercial paper (CP) outstanding and long-term debt, ended F2019 at $30.9 billion, or 7.3% of adjusted net assets, up from 6.3% as at fiscal YE2018. In the second half of 2018, the Fund increased the authorized limit on unsecured debt to an aggregate principal amount of $35 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 continue to increase over the near term; however, overall recourse debt is expected to remain low, providing considerable room for cyclical fluctuations in asset values.

DBRS notes that the Fund meets the 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’ CP 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 it provides considerable short-term financial flexibility.

DBRS notes that in F2019, the board approved Strategy 2025, which focuses on adopting a global investment approach, including increasing its allocation to emerging markets, using more technology and data in its investment decisions, and furthering talent and culture at CPPIB. As CPPIB continues to place more emphasis on risk management, it established a new role of Chief Financial and Risk Officer in F2018, formally constituted a Risk Committee of the Board in F2019 and continues to refine its integrated risk framework. As part of its focus on technology and data, CPPIB appointed a Chief Technology and Data Officer, a newly created role, to lead the development and enhancement of technology and data capabilities and improved analytics.

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 & Criteria.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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.

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