TEXT-S&P affirms Canada Pension Plan Investment Board 'AAA' rating

Tue Dec 4, 2012 3:03pm EST
 
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Overview
     -- We are affirming our 'AAA' long-term issuer credit and 'A-1+' 
short-term rating on the Canada Pension Plan Investment Board (CPPIB).
     -- We are also affirming our 'A-1+' global scale and 'A-1(High)' Canada 
scale commercial paper on subsidiary CPPIB Capital Inc.
     -- The ratings primarily reflect the board's very large net asset 
position and positive net contributions until 2021.
     -- The stable outlook reflects our expectation that the CPPIB will 
maintain a very large net asset position and conservative risk management 
framework.

Rating Action
On Dec. 4, 2012, Standard & Poor's Ratings Services affirmed its 'AAA' 
long-term issuer credit and 'A-1+' short-term rating on the Canada Pension 
Plan Investment Board (CPPIB). The outlook is stable. At the same time, 
Standard & Poor's affirmed its 'A-1+' global scale and 'A-1(High)' Canada 
scale commercial paper on subsidiary CPPIB Capital Inc. In addition, Standard 
& Poor's assigned its 'AAA' long-term and 'A-1+' short-term foreign currency 
ratings to CPPIB. 

Rationale
The ratings on the CPPIB reflect Standard & Poor's opinion of the board's 
single mandate as investment fund manager for the Canada Pension Plan (CPP), 
in which enrollment is mandatory for all Canadian workers outside Quebec; 
large investment portfolio and strong net creditor position; well-developed 
corporate governance and risk management frameworks; experienced management 
team; legislatively enshrined independence; and right to hold assets with a 
fair value no less than CPP liabilities. The ratings also incorporate what we 
consider to be the board's relatively short, albeit favorable, operational and 
investment track records; and requirement to maintain internal processes that 
are scalable with the increasing size and complexity of its investment fund.

The CPPIB presides over Canada's largest single-purpose capital pool. It held 
net assets of C$170.1 billion as of Sept. 30, 2012. This is similar to that of 
the Caisse de depot et placement du Quebec (AAA/Stable/A-1+), which manages 
the majority of Quebec's public sector pension and insurance plans. According 
to the report of Canada's chief actuary released in 2010, the board will 
continue to receive positive net CPP contributions until 2021. As a result, we 
expect its investment fund to increase for the foreseeable future, although 
difficult market conditions may temper the pace in the near term. 

Although the CPPIB is a federal Crown corporation, it operates at arm's length 
from the Government of Canada (AAA/Stable/A-1+) and the participating 
provincial governments. The board is legally separate from the CPP and any 
debt it issues does not benefit from a government guarantee. In our view, the 
board has a high degree of independence and a considerable incentive to act in 
the plan members' best interests by virtue of its strong legislative 
framework. Revisions to this framework would require the consensus of the 
federal government and two-thirds of the provincial governments in number and 
population--a higher approval threshold than the amending formula for Canada's 
constitution. We believe this goes a long way toward enabling the CPPIB to 
operate and invest without political interference. 

While legally separate from the CPP, the board is responsible by law and 
through an administrative agreement with the federal government for the plan's 
funding liabilities. However, the CPPIB has advised us that its obligation to 
honor these funding liabilities is subject to an entitlement under the Canada 
Pension Plan Act (CPP Act) to have assets with a fair value no less than its 
liabilities. It has also advised us that this would include any potential 
market debt it might issue through its subsidiary, CPPIB Capital Inc. As a 
consequence of this arrangement, the board believes the legal concept of 
priority does not apply when considering its obligation to meet CPP funding 
liabilities relative to potential market debt. Nevertheless, we view this 
arrangement as a positive credit factor, as it helps ensure the CPPIB's 
responsibility for the CPP funding liabilities, in itself, is unlikely to 
result in the board becoming a net debtor.

For the three months ended Sept. 30, 2012, the board's portfolio increased 
2.6% to C$170.1 billion. Growth reflected investment income of C$3.1 billion, 
equivalent to an investment return of 1.9%, and net CPP contribution inflows 
of C$1.3 billion. We consider the board's return to be sound given the ongoing 
turbulence in capital markets and slowing global growth. Its active management 
and private market performances buttressed results during this turbulent 
period.

The board issues commercial paper (CP) through CPPIB Capital, and may also 
consider issuing medium-term notes (MTNs) as well. The parent has set the 
borrowing limits for the CP at C$10 billion and the MTN program at C$5 
billion, combined representing less than 10% of net assets. Since initiating 
the CP program, the amount outstanding has risen to about $6 billion. The 
board has no immediate plans to issue debt under the MTN program. However, it 
could do so at any time.

Outlook
The stable outlook reflects our expectation that the CPPIB will maintain a 
very large net asset position and conservative risk management framework. 
Although we consider it very unlikely in the next two years, not meeting this 
expectation could result in an outlook revision to negative.

Related Criteria And Research
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

Rating List
Ratings Affirmed

Canada Pension Plan Investment Board
 Issuer credit rating
  Local currency                          AAA/Stable/A-1+

CPPIB Capital Inc.
 Commercial paper
  Global scale                            A-1+
  Canada scale                            A-1(High)

Ratings Assigned
Canada Pension Plan Investment Board
 Issuer credit rating
  Foreign currency                        AAA/Stable/A-1+


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.