DBRS Morningstar Confirms Credit 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 its credit 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)
-- Euro Commercial Paper Notes at R-1 (high)

All trends are Stable.

The credit ratings on the Notes are based on the unconditional and irrevocable guarantee provided by PSP Investments. Furthermore, all the credit 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 one-year rate of return of 4.4% for the year ended March 31, 2023 (F2023), outperforming its benchmark return of -2.8%. The outperformance was mostly driven by foreign currency gains of 5.8% and the strong returns generated by private assets, notably 19.0% by infrastructure and 10.9% by natural resources, as well as by credit investments, which gained 13.1%. These gains offset the negative to moderately positive returns posted by public equities and bonds.

Net assets rose to $243.3 billion as of March 31, 2023, growing by 5.7% over the year. Although debt with recourse to the Fund from the capital market debt program increased by $1.3 billion to $24.0 billion as of March 31, 2023, its share of adjusted net assets as of March 31, 2023, remained unchanged at 9.0% as it was on March 31, 2022. Subsequent to the fiscal year-end, PSP Capital issued $1.25 billion of 4.150% Senior Notes due 2033, EUR 75.0 million of 3.679% Senior Notes due 2043, $1.0 billion of 4.400% Senior Notes due 2030 (Green Bonds), and reopened the 4.150% Senior Notes due 2033 by issuing an additional $500 million. PSP Investments has also launched a euro commercial paper (CP) program to diversify its investor base and capitalize on the natural hedge provided by currencies under the euro program. 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 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 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 F2023 was the second 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 included increasing investment exposure to the Asia-Pacific markets, which will support diversification across geographies, asset classes, and investment strategies. Climate change is another area of focus. PSP Investments launched a firm-wide climate change strategy that includes six short-term targets to be met by 2026. By executing on its climate strategy, PSP Investments anticipates reducing the portfolio's greenhouse gas (GHG) emissions intensity by 20% to 25% by 2026, relative to its September 2021 baseline, and eventually transitioning to global net-zero GHG emissions by 2050. In addition, PSP Capital issued a second 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 factors, including diversity, equity, and inclusion, into its investment approach and company operations.

F2023 was also Deborah K. Orida's first year as chief executive officer, after the retirement of Neil Cunningham. 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 (ESG) 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/416784 (July 4, 2023)

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

The principal methodologies applicable to the credit ratings are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 27, 2023; https://www.dbrsmorningstar.com/research/413011) and North American Structured Finance Flow-Through Ratings (November 22, 2022; https://www.dbrsmorningstar.com/research/405619).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The full report providing additional analytical detail is available by clicking on the link under Related Research below or by contacting us at [email protected].

DBRS Limited
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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