In a turbulent financial environment, the Caisse de depot et placement has significantly increased its debt over the past year, a situation which an expert says may carry certain risks.
At the end of December, the institution’s liabilities, or what it owes to creditors, totaled $71.9 billion, or 37% more than a year earlier, the latest financial statements show.
These liabilities accounted for 15% of the Caisse’s total assets, compared to 11% at the end of 2021. We have to go back to 2014 to find a higher percentage (17%).
However, the Caisse’s relative indebtedness is lower than that of other major Canadian investors, including the Canada Pension Plan Investment Board (21% of total assets) and OMERS (17%).
repurchase agreement
Photo from the Desjardins website
Denis Latulippe
Professor at Laval University
The increase is mainly explained by the increased use of a type of short-term borrowing called a repurchase agreement, better known by its nickname “repo”.
The Caisse de dépôt sells securities such as government bonds to another investor and buys them back a few days or weeks later at a slightly higher price.
Pension funds are increasingly using this form of “financial engineering,” says Denis Latulippe, a professor at Laval University and former chief actuary of the Quebec Pension Plan (QPP).
interest rate
The aim is not to speculate, but to ensure that the assets of the Caisse de depot react more strongly to interest rate fluctuations, explains the specialist. This is important because the liabilities of pension plans, be they the QPP or those of government employees, are very interest rate sensitive.
In general, the Caisse does not materially increase its risk appetite by using this form of financial leverage, claims Mr Latulippe.
“But if it’s done wrong, there can be situations where […] that can become a problem,” he nevertheless warns.
Crisis in Britain
This happened in the UK last autumn, the actuary notes. A sudden rise in interest rates linked to a poorly designed national budget project plunged several pension funds into liquidity crises and forced the Bank of England to intervene.
The Caisse declined to make one of its executives available to give the Journal more details on the strategy behind increasing its liabilities.
A spokeswoman, Kate Monfette, limited herself to saying that the situation was due to increased liquidity needs related to the increase in her investments in infrastructure and in loans to companies and governments.
Note that the “absolute risk” of the Caisse’s portfolio reached 16.8% in 2022, slightly higher than that of its reference index (16.1%). In 2021 it was 14.9%.
Caisse Debt
- Total Liabilities: $71.9 billion (+37%)
- Bind: $32.8 billion (+30%)
- Repurchase Agreements: $29.6 billion (+97%)
- Other liabilities: $9.6 billion (-22%)
- Total Assets: $473.8 billion (+0.3%)
- Net worth : $401.9 billion (-4.3%)
Note: Data as of December 31, 2022
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