Friday 27 March 2009
CPPIB Taking on Leverage and Risk
Everyone else is shedding debt and de-leveraging but the Canada Pension Plan Investment Board is planning to do the exact opposite according to CPPIB to Issue Debt in today's Globe and Mail. Especially interesting is the statement that they will use the money to invest in, among other things, private debt. In other words they want borrow money cheaply on the market to turn around and lend it out privately at higher return. It cannot be but at higher risk. Is that wise?
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3 comments:
I don't know if the CPPIB will make wise choices in purchasing private debt, but it has to be a lot wiser to do this now than it was to do it a year ago when prices were much higher.
A more detailed article I read on the subject indicated that some of CPPIB's was already somewhat leveraged - in the form of mortgages on some of their properties - and that the main goal was to change how it was raising funds, as they could get a better rate in the bond market than using their current methods. Similarly, the goal stated in the other article that I read was to buy more stable revenue generating investments, such as infrastructure, airports and real estate.
At any rate, this seems like a good time to be taking on debt if you can. There's a lot of very attractive buying opportunities at the moment. If smart investments don't provide a great return by 2019, we'll probably have bigger problems to worry about than an insolvent pension fund.
It may be smart to do this but does the CPPIB need to do it to attain its goals? Are they matching maturities? If they borrow short-term and lend long-term what happens if inflation spikes up? - CPPIB's short-term borrowing rate spikes up but they are locked into a long-term lending rate. The Globe article says CPPIB plans to issue short and medium term debt.
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