The debt of the Caisse explodes

In a turbulent financial context, the Caisse de depot et placement substantially increased its debt last year, a situation that may present certain risks, according to an expert.

At the end of December, the institution’s liabilities, or what it owes to creditors, reached $71.9 billion, or 37% more than a year earlier, the most recent financial statements show.

These liabilities represented 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%).

Buy-back agreement

Photo taken 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 “repurchase agreement”, better known by its English nickname, “repo”.

Through this process, the Caisse de dépôt sells securities such as government bonds to another investor, then buys them back at a slightly higher price a few days or weeks later.

Pension funds are increasingly using this form of “financial engineering,” points out Denis Latulippe, professor at Laval University and former chief actuary of the Quebec Pension Plan (QPP).

Interest rate

The objective is not to speculate, but to ensure that the assets of the Caisse de depot react more to interest rate fluctuations, explains the specialist. This is important because the liabilities of pension plans, whether it be the QPP or that of government employees, are very sensitive to interest rates.

In general, the Caisse does not significantly increase its risk taking by using this form of financial leverage, maintains Mr. Latulippe.

“But if it’s done wrong, there can be situations where […] it can be a problem, ”he warns nevertheless.

Crisis in the UK

Last fall, this is what happened in the United Kingdom, notes the actuary. A sudden rise in interest rates linked to a poorly crafted government budget project plunged several pension funds into liquidity crises, forcing the Bank of England to intervene.

The Caisse refused to make one of its officers available to give more details to the Journal on the strategy behind increasing its liabilities.

A spokeswoman, Kate Monfette, confined herself to saying that the situation stemmed from an increased need for liquidity linked to the increase in its investments in infrastructure as well as in credit to businesses and governments.

Note that the “absolute risk” of the Caisse’s portfolio reached 16.8% in 2022, which is slightly higher than that of its benchmark index (16.1%). In 2021, it was 14.9%.