The pension liabilities of companies in or near bankruptcy deserve closer attention, said a special report issued Wednesday by Fitch Ratings.
For holders of debt in distressed companies, one big but often overlooked issue is the amount of leverage that the Pension Benefit Guaranty Corp. holds during reorganization negotiations to protect its claims for pension liabilities, according to Fitch Ratings. The PBGC can file claims for three types of liability: unpaid premiums, missing contributions and unfunded liability.
Fitch Ratings analysts looked at 10 “deeply speculative” companies that sponsor defined benefit plans and found that their calculations of pension liabilities “deviate significantly” from those made by the PBGC. PBGC claims for unfunded pension liabilities can be 25% higher than a company’s own calculation because the agency has the statutory authority to use a more conservative discount rate for the calculation. While Fitch analysts found that companies used rates ranging from 3.8% to 6.7%, the PBGC uses a rate of 1.75%. Costs also are higher because the PBGC demands immediate vesting when a plan is terminated.
“I don’t think most people are aware of the claim size, which really is the pivotal point of the (PBGC’s) claim” in a bankruptcy, said John Shen-Sampas, director of leveraged finance in Fitch Ratings’ U.S. corporates group, in an interview. “It is a huge issue.”
Larger PBGC claims give the agency more bargaining power during bankruptcy negotiations. PBGC recovery amounts were also “noticeably better than other unsecured creditors because of the various tools available to the PBGC,” the report said.
One of the PBGC’s most effective tools is the authority to file tax liens on pension plan sponsors and their parent or affiliate companies, in the U.S. or overseas, to protect the agency’s claim for some portion of the pension liability. In bankruptcy proceedings for Consolidated Freightways Inc., Delphi Automotive PLC and Hawker Beechcraft Corp., debtors made cash payments to have the PBGC release its liens so the reorganization could move forward.
Another trend is for the PBGC to waive its right to force restoration of the pension fund to the sponsor, in order to get more money for the fund, Mr. Shen-Sampras said. “The PBGC’s leverage is the size of the claim, and the extra cash they can get for releasing some of their rights.”
“If you’re holding debt (in a distressed company), you might want to look into their pension liabilities and try to figure out what’s the worst-case scenario, so you will have a better sense of how much recovery you can get,” Mr. Shen-Sampas said. “The balance sheet may not tell you the whole story.”