DBRS Morningstar Confirms Ratings on Public Sector Pension Investment Board and PSP Capital

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 -0.6% for the year ended March 31, 2020 (F2020), outperforming its benchmark (BM) of -1.6%. The negative return reflects the shock that the global economy experienced in the first months of the Coronavirus Disease (COVID-19) pandemic, which occurred at PSPIB’s fiscal year-end. Consequently, various asset classes delivered mixed results. The major positive return drivers were the fixed income portfolio, which added a gain of 10.0%, slightly outperforming its BM of 9.9%; infrastructure, delivering a return of 8.7% and outperforming its BM of -3.2%; and private equity with a return of 5.2%, while slightly underperforming its BM of 6.9%. However, the annual growth of the Fund was affected by the unprecedent events arising from the pandemic. The public market equities portfolio experienced a particularly negative impact through the weeks leading up to the fiscal year end, delivering a -11.2% return for the year and underperforming the BM of -10.0%.

Net assets rose to $169.7 billion as of March 31, 2020, growing by 1.1% over the year. Debt with recourse to the Fund from the capital market debt program rose by $1.7 billion to $15.8 billion, or 8.5% as a share of adjusted net assets as of March 31, 2020, compared with 7.8% as of March 31, 2019. Subsequent to the fiscal year end, PSP Capital issued $1.5 billion of Series 13 medium term notes (MTNs). PSP Capital aims to launch a global MTN program in F2022. 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 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 stayed positive in the last twenty years; although, they continue to trend down.

Over the past year, PSPIB continued to diversify into private markets. As all asset classes, including private markets, are within the range of their targets, the Fund intends to focus more on managing the portfolio from a total fund perspective to deliver on its risk return objective. Credit investments have also been added to the mix to broaden diversification at the total portfolio level, which proved to be beneficial during the time of the recent pandemic-related crisis. PSPIB continues to increase its global footprint with offices in Ottawa, Montréal, London, New York, and a new office in Hong Kong, which was able to ramp up its operations with additions to private equity and infrastructure teams in F2020.

The rating includes additional analysis of the Fund’s expected performance in the context of the global efforts to contain the spread of the pandemic. The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame. The scenarios were updated on December 2, 2020. For details, see “Global Macroeconomic Scenarios: December Update” at https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-update. For the confirmed ratings, DBRS Morningstar considered impacts consistent with the moderate scenario in the referenced commentary in its analysis.

While the extent and duration of the pandemic are uncertain, PSPIB remains well positioned to meet short-term liquidity needs and longer-term liability obligations supported by a strong governance and long-term investment horizon.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 27, 2020) and North American Structured Finance Flow-Through Ratings (January 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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@dbrsmorningstar.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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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