Increasingly sophisticated deal financing involving companies with large pension liabilities is spurring the Pension Benefit Guaranty Corp. to play a more active role in the process.
“You need to understand that (pension) liability before you negotiate the deal,” said Sanford Rich, head of the agency's office of negotiations and restructuring. “We want people to understand that if you are a private equity shop purchasing some of the assets of a company, and it will deteriorate the credit of that company, assume that we will be there.”
Mr. Rich, who until joining the PBGC last year was a managing director of the restructuring and financial advisory services firm Whitemarsh Capital Advisors LLC, New York, is frustrated by the limited tools the Employee Retirement Income Security Act, the nearly 40-year-old pension law.
“When ERISA was new, typical financing came from an investment-grade creditor, and an unsecured creditor like PBGC would get a good recovery. But as financing has evolved and assets have been more highly leveraged, now the collections for the unsecured creditor could be effectively zero,” Mr. Rich said in an interview. He noted that he “speaks the language” of less-traditional deals and singles out the private equity industry “because they are the $400 billion uninvested cash pile that will do a lot of these” deals.
While he thinks the PBGC has been “insufficiently aggressive” in recent years toward acquisitions of companies with vulnerable pension funds, “we're being more aggressive now,” Mr. Rich said. “We're not going to allow it to happen if we can stop it.”
To get more clout as a potential creditor and identify potential problems early on, the PBGC is reinvigorating its “early warning” program and spending a lot more time in court trying to seize company assets to cover pension liabilities and to hold companies accountable.
Using powers granted by ERISA, the early warning program allows agency officials to zero in on sizable business transactions that could pose problems to the pension plans — and eventually to the PBGC —based on either the company's financial troubles or its underfunded pension plans. Of particular concern to the PBGC are spinoffs of subsidiaries, control group breakups, leveraged buyouts, transfers of significantly underfunded pension liabilities before a sale or major divestiture, payment of unusual dividends or swapping secured debt for previously unsecured debt.
For a company with a below-investment-grade bond rating and pension liabilities exceeding $25 million — or any company with a current year pension fund obligation of more than $25 million plus an additional unfunded liability of $5 million or more — the PBGC will push further.
For any transaction considered at risk, the PBGC will attempt to negotiate some protection short of plan termination. The negotiation could involve additional cash contributions from any party in the deal that is willing, (usually the seller) or letters of credit, some company assets, or guarantees from the stronger parties to assume the pension fund or pay termination liabilities if the sponsor ultimately cannot support the pension fund, according to information in the early warning program's documents.
The trick, say PBGC restructuring officials on Mr. Rich's team, is getting the selling company's control group to negotiate additional pension protection before the control group dissolves. That strategy worked in 2007, when Daimler AG was selling 80.1% of Chrysler LLC to Cerberus Capital Management. After the PBGC came calling, Daimler agreed to contribute $200 million to Chrysler's plans over five years and guaranteed $1 billion for up to five years if any pension plans were terminated, which did not happen. “That's a good example of a good corporate citizen,” Mr. Rich said.