DBRS Confirms PSPIB and PSP Capital Inc. at AAA and R-1 (high)

DBRS has today confirmed the Issuer Rating of the Public Sector Pension Investment Board (PSP or the Fund) at AAA, with a Stable trend. The Short-Term Promissory Notes and Medium-Term Notes of PSP Capital Inc., the guaranteed financing subsidiary of PSP, are also confirmed at R-1 (high) and AAA, respectively, with Stable trends. Despite the erosion in the asset base resulting from the downturn in investment markets, PSP remains on sound footing as it continues to benefit from its large base of unencumbered assets (totaling $33.8 billion at March 31, 2009), robust liquidity position, solid cash flow outlook and modest level of recourse debt.

PSP recorded an investment loss of 22.7% for the year ending March 31, 2009, missing its benchmark return by 5.1 percentage points. The weak performance was driven by Canadian and non-Canadian equity classes, which recorded the worst losses at 32.3% and 30.2%, respectively, although did perform in line with benchmarks. The notable deviation from the benchmark reflects additional write-downs on asset-backed commercial paper (ABCP) and collateralized debt obligations (CDOs), weak real estate valuations, and currency hedges. Recourse debt rose in line with expectations and ended the 2009 fiscal year at $2.6 billion or 7.2% of net assets, a level easily manageable for the rating. The increase in recourse leverage resulted from PSP launching its new medium-term note program under which it issued $1 billion.

Since fiscal year-end, the major equity markets have posted robust results. Combined with sizeable positive cash inflows, this has likely translated into a significant increase in net assets in excess of 20% and helped reduce relative leverage as debt is not expected increased this year. Over the longer term, PSP is expected to continue to record sound returns as it appears well positioned to benefit from the market recovery and take advantage of attractive investment opportunities due to its strong liquidity profile and the sizeable annual contribution inflows from depositors ($4.4 billion in fiscal 2009). Recourse debt is expected to fluctuate somewhat depending on needs but over the medium term is forecast to remain well within the Fund’s limit for recourse debt of $4 billion. In support of its lending activities, PSP maintains a healthy level of liquid assets that totaled $8.3 billion at December 31, 2009.

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

DBRS ratings on public pension funds and pension fund asset managers are primarily based on the funding status, membership fundamentals and cash flow outlook of the public pension plan or pension plan depositors, the net asset and liquidity position of the fund in relation to outstanding recourse debt, the fund’s investment track record and portfolio management strategy as well as the financial strength of plan contributors.

This is a Corporate (Public Finance) rating.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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