Fitch Ratings - New York - 03 Jun 2021: Fitch Ratings has assigned a Long-Term IssuerDefault Rating (IDR) of 'AAA' and a Short-Term IDR of 'F1+' to Public Sector PensionInvestment Board (PSP) and its debt-issuing subsidiary, PSP Capital, Inc. Fitch has alsoassigned ratings of 'AAA' and 'F1+' to PSP's unsecured debt and commercial paper (CP),respectively. The Rating Outlook is Stable.
KEY RATING DRIVERS
PSP's ratings reflect its exceptionally strong asset overcollateralization and liquidity levels, creditor priority of debt holders to amounts coming due under the relevant pension plans, the captive nature of asset inflows, experienced management team, solid long-term investment track record, strong corporate governance, and a supportive regulatory framework. Ratings also reflect PSP's role as an investment manager, which means it is not directly responsible for the payment of pension obligations. Fitch believes this profile is incrementally favorable relative to peers that are pension funds.
Offsetting factors include the competitive investment environment, which may make it more challenging to identify attractive investment opportunities particularly at scale and the relatively high proportion of less liquid and private assets in the portfolio, which could result in higher performance volatility.
At March 31, 2020 (fiscal year-end 2020, FYE20), PSP had CAD169.8 billion of net assets, making it the fifth largest Canadian pension fund asset manager. PSP's captive contributions are highly predictable over time, and allow PSP to invest on a long-term horizon while maintaining appropriate liquidity levels. Net annual contributions averaged 2.5% of beginning of period net assets from fiscal years 2017-2020, which is strong relative to peers. PSP's assets are well-diversified by asset class, geography and industry, which mitigates the potential adverse correlation risk with developments in the Canadian economy and the risks related to the lower relative liquidity of its private investments.
PSP has a strong track record of investment performance, outperforming its total fund benchmarks by 0.7% and 1.0% on a five and 10-year basis at FYE20. Despite initial performance challenges in 2020, resulting from the coronavirus pandemic, Fitch expects PSP to generate a materially stronger annual return in FY21, driven by the rebound in asset prices in the second half of the year.
Fitch utilizes gross debt (excluding repurchase agreements and securities sold short) to net assets, as its primary leverage ratio for PSP and other pension plan investment managers, given Fitch's focus on asset overcollateralization, while liabilities from securities financing transactions could be satisfied via associated collateral. Based on this measure, leverage was 0.09x at FYE20; in line with historical levels and within Fitch's 'aa and above' benchmark range of 0.15x or lower for investment companies.
Leverage was also below PSP's internal limit for recourse debt of 0.10x, viewed favorably by Fitch. Fitch expects PSP's leverage not to materially exceed historical averages absent a substantial deterioration in asset prices. As a complementary leverage metric, Fitch also considers debt, including repurchase agreements and securities sold short, to net assets, which was a relatively low 0.19x at FYE20.
Liquidity is viewed as exceptionally strong given predictable and reliable contributions, cash on hand, liquid investments, and the ability to use net pension contributions to satisfy debt obligations. At FYE20, PSP had CAD4.8 billion in balance sheet cash and money market securities, CAD76.9 billion in marketable equity and fixed income investments and CAD3 billion of unutilized revolver capacity, split into CAD2 billion committed revolving credit facility and CAD1 billion in uncommitted demand lines of credit. This compared with CAD15.5 billion of outstanding CP and unsecured term notes, at par. PSP did not need to access additional term funding despite outsized market volatility resulting from the pandemic.
PSP's ratings are constrained by Canada's Country Ceiling, which reflects Fitch's assessment of the transfer and convertibility risks. On June 24, 2020, Fitch downgraded Canada's IDR to 'AA+' from 'AAA', but the Country Ceiling was affirmed at 'AAA'.
The Stable Outlook reflects Fitch's expectation that PSP will maintain exceptionally strong asset overcollateralization and liquidity over the Outlook Horizon and exhibit long-term investment performance consistent with its benchmarks and reference portfolio. The Outlook also reflects Fitch's expectation that PSP will continue to operate against the backdrop of a stable operating environment in terms of sovereign credit risk, country ceiling risk and the legal and regulatory environment.
The unsecured debt rating is equalized with the Long-Term IDR, reflecting PSP's predominantly unsecured funding profile and expectations for average recovery prospects in a stressed scenario. The Short-Term IDR and CP rating of 'F1+' reflect the strongest intrinsic capacity for timely repayment of financial commitments and maintain the correspondence between Short- and Long-Term IDRs, as the 'F1+' IDR corresponds to a long-term IDR of 'AAA' under Fitch's criteria.
SUBSIDIARY AND AFFILIATED COMPANY
The ratings assigned to wholly-owned subsidiary PSP Capital Inc. are equalized with those of its parent to reflect the full guaranty provided to PSP Capital Inc. by PSP.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Positive rating action is not possible, given the ratings are already at the highest levels on the long- and short-term rating scales.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Factors that could, individually or collectively, lead to negative rating action/downgrade include a significant reduction in liquid assets, a material increase in leverage relative to historical averages and/or PSP's own stated leverage limits, including the recourse debt limit of 0.10x, a material change in risk appetite resulting in higher performance volatility and/or a material increase in proportion of less liquid investments, particularly in an attempt to improve the funded status of the plan, weak investment performance or increased single-name or industry concentrations, or an actual or reasonably expected change in the rule of law that has the effect of calling into question credit priority;
--The ratings are also sensitive to changes in the credit risk profile of Canada, to the extent that any such changes resulted in a reduction in Canada's Country Ceiling to a level below PSP's IDR;
--The unsecured debt rating is sensitive to changes in PSP's Long-Term IDR and would be expected to move in tandem;
--The Short-term IDR is primarily sensitive to changes in the long-term IDR and secondarily to changes in PSP's Funding, Liquidity and Coverage score;
--The CP rating is sensitive to changes in PSP's Short-Term IDR and would be expected to move in tandem.
SUBSIDIARY AND AFFILIATED COMPANY
The ratings of PSP Capital, Inc. are equalized with those of its parent and would be expected to move in tandem.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit
https://www.fitchratings.com/site/re/10111579
DATE OF RELEVANT COMMITTEE
26 May 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OFRATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is ascore of '3'. This means ESG issues are credit-neutral or have only a minimal credit impacton the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
| ENTITY/DEBT | RATING | ||
|---|---|---|---|
| PSP Capital Inc. | LTIDR | AAA Rating Outlook Stable |
New Rating |
| STIDR | F1+ | New Rating | |
| senior unsecured | LT | AAA | New Rating |
| senior unsecured | ST | F1+ | New Rating |
| Public Sector Pension Investment Board | LT | AAA Rating Outlook Stable |
New Rating |
FITCH RATINGS ANALYSTS
Evgeny Konovalov
Director
Primary Rating Analyst
+1 212 612 7839
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street New York, NY 10019
Dafina Dunmore
Senior Director
Secondary Rating Analyst
+1 312 368 3136
Johann Juan
Senior Director
Committee Chairperson
+1 312 368 3339
MEDIA CONTACTS
Sandro Scenga
New York
+1 212 908 0278
sandro.scenga@thefitchgroup.com
Additional information is available on www.fitchratings.com
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
Dodd-Frank Rating Information Disclosure Form
ENDORSEMENT STATUS
PSP Capital Inc.
Public Sector Pension Investment Board
DISCLAIMER
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS
IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT
DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED AN OTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYSTIS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.
COPYRIGHT
Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the credit worthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or anumber of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.
SOLICITATION STATUS
The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.