New York - In an unusual move, General Motors Corp. will use proceeds from a huge convertible securities issue to help reduce its nearly $10 billion unfunded pension liability.
GM launched a $3 billion convertible debenture issue Feb. 28 as part of a program to strengthen its balance sheet in the midst of a soft market for U.S. automobiles.
Although other companies may have used proceeds from new securities issues to bolster their pension plans, it's rare for a company to make a public announcement upfront that the pension fund will be the beneficiary.
Said one pension actuary, who asked to remain anonymous: "I have never seen a company specify in advance that this is where the proceeds will be used."
Ted Hines, credit analyst at John Hancock Financial Services, Boston, said he hadn't seen a company specifically designate proceeds from a convertible issue for pension funding purposes. GM was being "a bit cautious," he said. "They got it out there because the convertibles market is hot. It is a very receptive market," he added.
"Whenever we have raised debt in the past, we usually said funding would be for `general corporate purposes,"' said GM spokesman Jerry Dubrowski. "I think the reason we wanted to be more specific is that we wanted the investment community to understand that we want to improve our balance sheet. This is the first time we have been so specific."
Plus, tax specialists said GM gets a triple break: a tax deduction for the contributions to its underfunded pension plans; tax breaks on investment gains in its $65 billion pension fund; and deductions for interest payments on the convertibles.
Mr. Dubrowski said GM's convertibles issuance is "the second largest ever, as far as we know." The largest was from rival automaker Ford Motor Co., Dearborn, Mich., which issued $5 billion in convertible preferreds in January. The Ford announcement said the proceeds would be used for "general corporate purposes." Ford spokesman David Reuter said the overfunded $36 billion Ford pension plan is "one of the bright spots on our balance sheet." He said the convertible preferred issue is associated with the company's overall reorganization and restructuring of its product line to regain market share in the soft market. According to the company's 2000 annual report, Ford's plan is overfunded by about $6.5 billion
Last year was a record year for convertible bonds, with companies raising $116 billion vs. $86 billion in 2000. Already this year, U.S. companies have issued $20 billion in convertibles.
Convertibles are hybrid securities sold as bonds, which can be converted to common stock at a specified price. Convertibles generally carry a lower interest rate than traditional bonds with similar maturities. The two tranches of GM's convertible issue carry coupon rates of 4.5% and 5.25%.
GM officials have not yet specified how much of the proceeds will go to the pension liability vs. the retiree medical liability.
Scott Lee, auto analyst at Chicago-based Fitch Ratings, a division of Fitch Inc., New York, said the GM move makes sense. "They are able to address two issues: how to access the capital markets at a lower cost; and how best to fund their liabilities."
Boosting the funded status of the pension plan, he said, would be "accretive" for the GM pension fund because pension expense likely would decline, he said.
Not everyone agrees. Ron Ryan, president of Ryan Labs Inc., a New York-based firm that specializes in developing custom liability indexes for pension funds, said issuing convertibles means GM would end up with two forms of debt rather than one.
"Pension liabilities are a debt," he said. "If you issue debt to pay for it, now you have two liabilities. They are betting that this will become cheap debt, but it starts out as debt. They are still saying they are having problems funding. Now they have two liabilities instead of one and the additional (carrying) costs."