The Caisse de dépôt et placement du Québec, grappling with losses and lagging returns, is planning to issue up to $8-billion in bonds by the end of next year as it moves to reduce its risk exposure.
The move is the fund's latest effort, under recently appointed head Michael Sabia, to shore up its financial structure after a disastrous 2008, as well as major writedowns it has booked so far this year on risky commercial real estate and private equity investments.
The Caisse said yesterday it has put in place a refinancing program to reduce its risk profile and simplify its structure by replacing part of its short-term debt with longer-term debt.
Mr. Sabia said in a statement the refinancing will help the Caisse improve returns in the medium term by locking in financing at historically low interest rates. "By limiting our exposure to the uncertainties inherent in short-term funding and by better matching the duration of our sources and uses of financing, the refinancing program is another important element of our plan to reduce financial risks and to strengthen the foundations of the Caisse," he said.
For former senior Caisse executive Michel Nadeau, the initiative is a sign that the Caisse needs cash. "This is about rebuilding liquidity," said Mr. Nadeau, who is now the executive director of the Institute for Governance of Private and Public Organizations.
"It's a good moment to borrow and seek out investment opportunities, given the fact that there are a certain amount of assets they have that are not very liquid and would be sold at a loss right now," he said.
Caisse spokesman Maxime Chagnon brushed aside the suggestion the Caisse needs to raise its liquidity levels. "The goal is to take advantage of the current market situation and reduce our short-term debt," he said. "This is not at all for liquidity purposes." He pointed out the bond issues won't increase the fund's leverage.
Up to $8-billion in bonds could be issued in Canada, the U.S. and Europe by the end of 2010, depending on market conditions, the Caisse said.
The proceeds of the refinancing program will be used to replace "certain short-term credit instruments with longer-term debt," the fund said in news release.
The bond issue comes as public concerns mount that the Caisse's financial difficulties could jeopardize the health of some of the public and private pension and insurance plans it manages, forcing them to hike contribution levels.
The Caisse is expected to lag the other big Canadian pension funds in returns this year since it kept its equities holdings relatively low amid the market rebound. The fund continues to play catch-up after posting a $40-billion loss on its investments in 2008, a negative return of 25 per cent versus the average return for its peers of minus 18 per cent.
In an update in August, the Caisse said it took $5.7-billion in writedowns related to risky commercial real estate loans and private equity bets, thus wiping out the 5 per cent gain it had posted in the first half of the year.
Credit rating agency DBRS Ltd. said yesterday it expects the Caisse's new debt to be triple-A, barring any intervening events. DBRS said it maintains an overall triple-A credit profile of the $120-billion institution, Canada's largest single pool of investment capital.
"The proposed financing will help reduce short-term refinancing risk," DBRS said in a research note.
Bertrand Marotte