CHICAGO - Montgomery Ward Holding Corp. might use surplus assets from its approximately $1 billion pension plan to help pay creditors.
The company filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code July 7. It is a rare example of a financially troubled company with an overfunded - rather than underfunded - pension plan.
Ward's has $270 million in surplus pension assets - listed in the company's 1996 securities filings as measured against present and projected liabilities.
David Comstock, senior investment analyst with the Signature Group, Schaumburg, Ill., which oversees the pension fund, wouldn't comment on the situation, but bankruptcy lawyers and other experts painted a picture of how they think the arrangement could work.
Ward's creditors, they say, probably will want the company to terminate its defined benefit plan to recoup the surplus assets.
About 60% of the surplus could be used to pay creditors. The company could create a successor plan and use some of the remaining surplus in that plan.
By setting up a new, richer plan, Ward's would lower the penalty - to 20% of the excess assets from 50% - it would have to pay the Internal Revenue Service for terminating the plan and taking the reversion. The new plan would have to have a cushion amounting to around 25% of the surplus Ward's intends to take out.
The company also could reduce the reversion tax to 20% by hiking existing benefits, but those interviewed expect Montgomery Ward to choose the replacement plan approach.
At best, the company would be able to pull out only around $172.8 million from its pension fund, after it satisfies all of the regulatory requirements. That's after taking into account the company's operating losses, which shelter it from paying upwards of 40% in income taxes on any tax-sheltered money it pulls out of its pension fund.
Ward's lost $144 million in the first three months of 1997, and is expected to lose $250 million for the first six months. That's on top of losses of $237 million in the year ended Dec. 28, 1996. The company listed its liabilities at $3.64 billion as of May 31, and its assets at $4.09 billion.
A bankrupt company's pension fund "is the first thing creditors look at," noted James Spiotto, partner in the bankruptcy section in the Chicago law firm of Chapman & Cutler.
"It is reasonably likely that both the debtor and the creditors would want (this) to occur," said Albert Koch, managing principal at Jay Alix & Associates, a turnaround consultancy based in Southfield, Mich.
Still, Montgomery Ward's problems go deeper than just paying off creditors.
"A quick fix such as taking money out of the pension fund doesn't solve any operational problems. It might provide some cash, but it would not be the final solution," said Mr. Spiotto. He added the company has to come up with a new strategic plan, a "vision" of how to survive in today's competitive environment.
Plus, the reversion process is lengthy and complicated.
The company still would have to give the Pension Benefit Guaranty Corp., the federal pension insurance agency, detailed assurances that siphoning off assets from its pension fund now will not result in a shortfall later.
Before it could take the reversion, Ward's would have to shut down its existing pension plan and buy annuities for all of its 53,000 participants, or give them lump-sum payments.
Moreover, because a reorganization plan and regulatory approval from the IRS and PBGC can take a long time, it's unlikely the retailer would see any of the money from the pension fund for at least a year.
And because interest rate shifts during that period could cause the surplus to evaporate, the company would have to try to lock the surplus in by using an immunized bond portfolio - buying bonds with a duration matching its liability - so that any drops in interest rates would not eat into the surplus.
Also, the retailer's creditors had not yet organized themselves into a court-approved committee by press time on July 18. So, no one is certain they intend to try to tap the company's pension surplus as part of a broader reorganization effort.
Rekha Balu from Crain's Chicago Business contributed to this story.
