DBRS Morningstar Confirms Ratings on Public Sector Pension Investment Board and PSP Capital Inc.

DBRS Limited (DBRS Morningstar) confirmed the Public Sector Pension Investment Board’s (PSP Investments or the Fund) Issuer Rating at AAA. DBRS Morningstar also confirmed the ratings on 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 PSP Investments. Furthermore, all the ratings are supported by PSP Investments’ 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 Morningstar) as sponsor of the plans, the high level of assets available to meet obligations, the strong liquidity position of PSP Investments, and a record of strong investment returns.

PSP Investments achieved a net investment return of 18.4% for the year ended March 31, 2021 (F2021), outperforming its benchmark (BM) of 16.5%. The strong return is attributable to a sharp rebound in equity markets and positive returns across all asset classes with the exception of fixed income. The major return drivers were public market equities, which gained 48.1%, outperforming their BM of 42.1%; private equity, which delivered 28.4% compared with a BM of 31.7%; credit investments, which added 10.5%, outperforming a BM of 9.6%; real estate with gains of 3.8% compared with a BM of -6.0%; and natural resources, with gains of 10.6% compared with their BM of 7.7%.

Net assets rose to $204.3 billion as of March 31, 2021, growing by 20.4% over the year. Debt with recourse to the Fund from the capital market debt program increased by $0.9 billion to $16.7 billion; however, given a strong asset growth in the year, it decreased to 7.6% as a share of adjusted net assets as of March 31, 2021, compared with 8.5% as of March 31, 2020. Since the last annual review completed on December 4, 2020, PSP Capital issued $1.0 billion of Series 14 Medium-Term Notes (MTNs). The global MTN program was launched in June 2021. Under this program, there were three new issuances of USD Senior Notes: USD 1.0 billion of 1.000% Senior Notes due 2026; USD 1.25 billion of 0.500% Senior Notes due 2024; and USD 1.0 billion of 1.625% Senior Notes due 2028. DBRS Morningstar expects PSP Capital to continue to issue term notes to refinance maturing debt, provide liquidity, and finance additional investment activities.

The Fund has a prudent approach to liquidity management and has ample sources of funding to draw upon. DBRS Morningstar notes that the Fund meets the DBRS Morningstar criteria for commercial paper (CP) liquidity support, as outlined in the Rating Canadian Public Pension Funds & Related Exclusive Asset Managers methodology’s appendix entitled “Self-Liquidity for Canadian Public Pension Funds and Related Exclusive Asset Managers’ CP 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; this is consistent with DBRS Morningstar’s policy on backup liquidity support for pension plans and provides considerable short-term financial flexibility. The transfers from the Government of Canada have stayed positive in the last 20 years.

PSP Investments is one of the leading investment managers that integrates various aspects of environmental, social, and governance factors, including diversity, equity, and inclusion (DEI), into its investment approach and company operations. Specifically, substantial work has been done this year in identifying investment risks and opportunities considering climate change. PSP Investments has a growing renewable energy portfolio totaling $3.8 billion of direct investments in more than 250 renewable energy assets. As all traditional asset classes are within the range of their targets, the Fund continues to focus more on managing the portfolio from a total fund perspective, while identifying individual opportunities within the existing classes. To increase geographical diversification, the allocation toward emerging market debt within the fixed income portfolio was increased. The Fund has an active DEI Council consisting of company volunteers who are dedicated to promoting DEI within the organization through various initiatives. PSP Investments has a diverse workforce and actively engages in fostering the DEI culture.

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 methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 30, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577