August 15, 2013
By Business Wire
CHICAGO — A majority of large U.S. corporate pension plans were underfunded at the end of 2012. Fitch Ratings believes funding levels at mid-year have improved with recent discount rate increases and strong equity market performance. While pension underfunding gaps have narrowed, Fitch believes severely underfunded plans taking advantage of funding relief could still face steep funding requirements in the years ahead.
Fitch’s review encompassed 224 nonfinancial U.S.-based companies with defined benefit pensions plans having U.S. projected benefit obligations (PBOs) of $100 million or more. Of the 224 companies analyzed, 148 were less than 80% funded and warrant further investigation, based on the 80% ‘at-risk’ threshold in the Pension Protection Act (PPA). [EXPAND Read more]
Of the remaining 76 companies, 57 were funded in the 80%-90% range while 19 companies were funded above the 90% level. The energy (oil and gas), retail and telecommunications sectors stood out with median plan funding levels of 70% or less.
Fitch believes the contribution amounts are material for many issuers. In Fitch’s sample, 36% of the 224 companies have an estimated pension outflow as a percentage of precontribution funds from operations (FFO; cash flow from operations less working capital) above a 10% threshold.
Fitch estimates that the potential funding requirements of 16 companies could amount to 40% or more of their 2012 precontribution FFO.
Relief provided for under the ‘Moving Ahead for Progress in the 21st Century Act’ (MAP-21) signed in July 2012 allows plan sponsors to lower near-term pension contributions through a materially higher discount rate for funding purposes. In Fitch’s opinion, cash flow constrained issuers may benefit from the near-term relief, but for the majority of plan sponsors a more prudent approach will call for funding above minimum levels.
Fitch does not anticipate taking any rating actions on an issuer based solely on possible pension contributions in 2013 or 2014. However, for a company on the edge of a rating category, the combination of weak earnings and the need for ongoing pension contributions could lead to a negative rating action.
Fitch would evaluate the company’s plans to address pension plan funding needs in the context of potential pressure on its liquidity needs. [/EXPAND]