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