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 1-year rate of return of 10.9% for the year ended March 31, 2022 (F2022), outperforming its benchmark (BM) return of 9.4%. The strong result is attributable to positive returns across all asset classes, particularly in private assets classes and with the exception of fixed income. The outperformance was mostly driven by private equity, which delivered a 27.6% return compared with a BM return of 19.5%; public market equities, which gained 6.0%, outperforming their BM return of 3.3%; and credit investments, which delivered a 7.5% return, outperforming a BM return of (0.5)%. On the other side, real asset classes generated double digit returns but underperformed their respective BMs, real estate gained 24.8% compared with a BM return of 30.2%; Infrastructure gained 13.9% compared with a BM return of 16.1%; and natural resources gained 15.9% compared with a BM return of 26.3%.

Net assets rose to $230.3 billion as of March 31, 2022, growing by 12.7% over the year. Debt with recourse to the Fund from the capital market debt program increased by $6.0 billion to $22.7 billion, or 9.0% as a share of adjusted net assets as of March 31, 2022, compared with 7.6% as of March 31, 2021. Subsequent to the fiscal year-end, PSP Capital issued USD 1 billion of 3.500% Senior Notes due 2027, AUD 230 million of 4.57% Senior Notes due 2032, re-opened the Floating-Rate Notes due 2025, by issuing an additional USD 400 million and CAD 750 million of 3.75% Senior Notes due 2029. 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 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” (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.

DBRS Morningstar notes F2022 was the first year of the board approved five-year strategy (PSP Forward), which takes into consideration long-term trends, risks, and priorities. PSP Forward focuses on enhancing the total Fund performance and global operations by aligning systems, resources, and investment focus; generating valuable insights; and building a high-performing team. Some of the key elements of PSP Forward include to increase the investment exposure to the Asia-Pacific Markets to more than $60 billion by F2026, which will support diversification across geographies, asset classes, and investment strategies. Climate change is another area of focus. In F2022, PSP Investments further developed a climate change strategy that aims to reduce the portfolio greenhouse gas emissions intensity, which will include substantial investments in green assets and transition assets. In addition, PSP Capital issued an inaugural Green Bond ($1 billion) with proceeds earmarked for climate-related and environmental projects. PSP Investments continues to advance the integration of various aspects of environmental, social, and governance (ESG) factors, including diversity, equity, and inclusion, into its investment approach and company operations.

The board also has a key responsibility of chief executive officer (CEO) succession planning. After Neil Cunningham announced his future retirement as President and CEO that will take place on March 31, 2023, the board appointed Deborah K. Orida as his successor effective September 1, 2022, enabling a transition period. Deborah K. Orida has 25 years of experience in the investments and finance industry and was most recently an executive at the Canada Pension Plan Investment Board, where she was the global head of Real Assets and Chief Sustainability Officer.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

The principal methodology is Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 26, 2022), 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].

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