DBRS Morningstar Confirms Public Sector Pension Investment Board and PSP Capital at AAA, Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of the Public Sector Pension Investment Board (PSPIB or the Fund) at AAA. DBRS Morningstar also confirmed the ratings of 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 PSPIB. Furthermore, all the ratings are supported by PSPIB’s 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 PSPIB, and a record of strong investment returns.

PSPIB achieved a net investment return of 7.1% for the year ended March 31, 2019 (F2019), close to its benchmark (BM) of 7.2%. All asset class strategies delivered positive results, although not all exceeded their BM. Private equity and private debt generated returns of 16.1% and 9.2%, respectively, outperforming their respective BM by more than 3.4%. The strong performance in private markets along with infrastructure and natural resources was enough to offset a weaker performance in public markets and real estate assets, which faced a challenging year marked by heightened volatility and lower yields, as a result of trade disputes and a weakened global economic outlook. Positive investment returns and ongoing fund transfers from the government led to a $14.9 billion increase in net assets, which rose to $167.9 billion as at March 31, 2019.

Debt with recourse to the Fund rose by $1.8 billion to $15.0 billion, or 8.2% as a share of adjusted net assets as at March 31, 2019, compared with 7.9% as at March 31, 2018. Subsequent to fiscal year end, PSP Capital issued $1.75 billion in medium-term notes (MTN), through the re-opening of MTN Series 7, the re-opening of MTN Series 9, and the issuance of MTN Series 12. PSP Capital also aims to launch a global MTN program in 2020. DBRS Morningstar expects PSP Capital to continue to issue term notes to refinance maturing debt and to finance additional investment activities. PSPIB’s recourse debt has remained below the 10% board limit, providing considerable room for cyclical fluctuations in asset values.

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’ Commercial Paper 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 Fund also receives semi-monthly fund transfers from the Government of Canada, which the Chief Actuary of Canada estimates will remain positive for at least five years, albeit at a declining rate.

Over the next decade, the Fund’s net assets under management are expected to surpass the $250 billion mark because of the strength of investment returns and government fund transfers. During the year ended March 31, 2019, PSPIB continued to reduce the exposure to public equities to 30.4% from 33.8%, while allocating greater resources to funding of private equities and private debt, which increased to 14.0% of net assets from 12.7% and to 6.2% from 5.8%, respectively. The Fund has indicated that after practically reaching its target asset allocations in F2019, it will be focusing more on managing the portfolio from a total fund perspective to deliver on its risk return objective. PSPIB continues to increase its global footprint with offices in Ottawa, Montréal, London, New York, and a new office in Hong Kong. The new office is expected to leverage local expertise to seize opportunities that will increase the scale worldwide, particularly in the Asia-Pacific region.

DBRS Morningstar notes that in F2019 the Government of Canada implemented a funding policy (Funding Policy) to be administered by the President of the Treasury Board. The Funding Policy provides the decision framework to support the funding of the four depository pension plans, whose assets are managed by PSPIB, including risk management practices and how to address a plan funding deficit or surplus. As part of the Funding Policy, an Asset Liability Committee (ALCO) was established that will include participation from representatives of the four plans, the Department of Finance, the Office of the Chief Actuary, and from PSPIB. The ALCO has started meeting in F2020 and will be responsible for setting the Reference Portfolio, which was previously determined by PSPIB’s board of directors. DBRS Morningstar sees this change as positive, as it will improve the communication between the Treasury Board Secretariat, the Office of the Chief Actuary, and PSPIB which will support the funding of the four depository pension plans and compliance with PSPIB’s mandate.

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

The principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers and Structured Finance Flow-Through Ratings, which can be found on dbrs.com under Methodologies & Criteria.

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 info@dbrs.com.

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.

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