DBRS Morningstar Confirms CPP Investments at AAA and CPPIB Capital Inc. at AAA and R-1 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Canada Pension Plan Investment Board (CPP Investments or the Fund) at AAA. CPP Investments is the federal non-agent Crown corporation responsible for managing the assets of the Canada Pension Plan (CPP or the Plan). DBRS Morningstar also confirmed CPPIB Capital Inc.’s Canadian Short-Term Promissory Notes, U.S. Commercial Paper Notes, and Euro Commercial Paper Notes programs at R-1 (high) and CPPIB Capital Inc.’s Medium-Term Notes at AAA. All trends are Stable. DBRS Morningstar notes that the ratings on the short-term note programs and long-term notes are predicated on the unconditional guarantees provided by CPP Investments on issuances. Furthermore, the strong ratings primarily reflect CPP Investments exclusive legislated mandate to manage CPP assets (including the legislative protection entitling CPP Investments to retain at all times assets that have a fair market value not less than its liabilities, including the liabilities under the guarantees in respect of debt issued by CPPIB Capital Inc., its robust liquidity position, its low recourse debt burden, and the strong fundamentals of the Plan.

In December 2016, the Canada Pension Plan Act, the Canada Pension Plan Investment Board 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, CPP Investments 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 base CPP account and the additional CPP account delivered strong net returns in F2021 of 20.5% and 11.6%, respectively, underperforming their corresponding Reference Portfolio’s return of 30.5% and 17.0%, respectively. On an aggregated basis, the total Fund earned a record net return of 20.4%, underperforming the aggregated Reference Portfolio’s return of 30.4% by 10.0%. The Fund’s record return was largely driven by strong performance in private and public equities, amid ultra-low interest rates and strong global equity markets; however, the aggregated Reference Portfolio performed better, driven by its higher asset allocation to global equities. The Fund generated net income of $83.9 billion, which, combined with the $3.7 billion in net contributions received, increased the Fund’s assets to $497.2 billion, corresponding to $490.9 billion in base CPP and $6.3 billion in additional CPP.

Recourse debt, consisting of commercial paper (CP) outstanding and long-term debt, ended F2021 at $36.4 billion, or 6.8% of adjusted net assets, down from 8.6% as at F2020. There was no CP outstanding as at F2021. In May 2021, the Fund increased the authorized limit on unsecured debt to an aggregate principal amount of $50 billion outstanding while maintaining the $15 billion limit on outstanding unsecured debt with a remaining term of less than one year. DBRS Morningstar 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 Morningstar notes that the Fund meets the DBRS Morningstar criteria for CP liquidity support outlined in the Appendix section in the “Rating Canadian Public Pension Funds & Related Exclusive Asset Managers” methodology. 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. It is also consistent with DBRS Morningstar’s policy on backup liquidity support for pension plans, and it provides considerable short-term financial flexibility.

DBRS Morningstar notes that in F2019, the board approved Strategy 2025, which focuses on adopting a global investment approach, including increasing the Fund’s allocation to emerging markets, using more technology and data in its investment decisions, and furthering talent and culture at CPP Investments. Because CPP Investments 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 continued to refine its integrated risk framework in F2020 and F2021.

The board also has a key responsibility of chief executive officer (CEO) succession planning. After Mark Machin stepped down in February 2021, the board was well prepared as succession planning is an ongoing process. CPP Investments appointed John Graham as the new President and CEO of CPP Investments. As a member of the senior management team where he was most recently the Global Head of Credit Investments, Graham was deeply involved in the design and execution of the organization’s strategy. Graham continues to be committed to CPP Investments’ long-term objectives.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19) pandemic. The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. The scenarios were updated on June 18, 2021. For details, see “Global Macroeconomic Scenarios: June 2021 Update” at https://www.dbrsmorningstar.com/research/380281.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 30, 2021) and North American Structured Finance Flow-Through Ratings (January 4, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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