DBRS Confirms Public Sector Pension Investment Board at AAA and PSP Capital Inc. at AAA and R-1 (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Public Sector Pension Investment Board (PSPIB or the Fund) at AAA. DBRS has also confirmed the ratings of notes (the Notes) issued by PSP Capital Inc. (PSP Capital) as follows:

-- AAA on the Medium-Term Notes
-- AAA on the Series 5 Medium-Term Notes
-- AAA on the Series 7 Medium-Term Notes
-- AAA on the Series 8 Medium-Term Notes
-- AAA on the Series 9 Medium-Term Notes
-- R-1 (high) on the Canadian Short-Term Promissory Notes
-- R-1 (high) on the U.S. Commercial Paper Notes

The ratings on the Notes are based on the unconditional and irrevocable guarantee provided by PSPIB. The trends on all ratings remain Stable. 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 as sponsor of the plans, the high level of assets available to meet obligations, the strong liquidity position and a record of strong investment returns.

PSPIB achieved a total investment return of 1.0% for the year ended March 31, 2016, exceeding its benchmark (BM) by 70 basis points (bps). Most assets classes met or exceeded their BMs with notable outperformance in real estate, infrastructure and private debt and notable underperformance in U.S. large cap equity and private equity. The positive investment return and ongoing pension contributions led to a $4.8 billion increase in net assets, which rose to $116.8 billion as of March 31, 2016. Debt with recourse to the Fund rose $1.4 billion to $9.3 billion, or 7.4% as a share of adjusted net assets.

As of December 8, 2016, the outstanding amount of commercial paper (CP) has fallen, $200 million in MTNs have matured and $2.25 billion in MTNs (Series 8 and Series 9) have been issued, resulting in an increase in the recourse debt-to-net assets ratio. DBRS expects PSP Capital to continue to increasingly refinance maturing debt with term note issuance to balance out the amount of outstanding CP and term notes. PSPIB has indicated that it will maintain recourse debt below the 10% internal limit, which is commensurate with the rating.

PSPIB maintains considerable flexibility for meeting its obligations to noteholders. The Fund has a prudent approach to liquidity management and has ample sources of funding to draw upon. Most significantly, PSPIB has maintained highly liquid assets, as defined by DBRS, in excess of 1.5 times the authorized limits of $3.0 billion and USD 5.0 billion for its Canadian and U.S. borrowing programs, respectively. 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.

Over the next decade, the Fund is expected to surpass the $200 billion mark on the strength of investment returns and net contributions. The Fund has indicated that it will continue to increase its allocations to private markets to better match the risk/return profile of the portfolio with the long-term, inflation-sensitive nature of the pension obligations. With rising assets under management, the Fund will also seek to improve its geographic diversification.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.