US - American companies are strategically using the bankruptcy code to rid themselves of the liabilities of their retirees, leaving the beleaguered Pension Benefit Guaranty Corporation (PBGC) to pick up the pieces, claims Madison Capital Management.
Madison senior vice president and portfolio manager Kjerstin Hatch said further claims by companies to offload their legacy, pension and health liabilities would put the PBGC under further strain.
The PBGC functions as a pension protection fund. According to its latest financial report, the corporation has amassed a record deficit of US$23.3bn for the fiscal year, more than twice the deficit reported last year.
The figure comprises US$12.1bn deficit for fiscal year 2004 plus the existing US$11.2bn deficit.
“The finances of the PBGC have significantly deteriorated as whole industries in the United States, including steel and airlines, have been forced into bankruptcy restructurings, in large part stemming from these legacy liabilities,” Hatch said.
“As one company in an industry enters bankruptcy to offload these liabilities, others are often forced to follow or be left with an uncompetitive cost structure.”
To make matters worse, the trend of using the bankruptcy code shows “no sign” of slowing, Hatch added.
“For example Interstate Bakeries, the producer of Wonder Bread and Hostess Twinkies recently filed for Chapter 11 bankruptcy in part to renegotiate unprofitable union contracts and potentially rid themselves of the health costs of their retirees,” she said.
“Other industries also suffering from so-called legacy liabilities, such as the automotive supply and supermarket sectors, could be next in pushing these liabilities onto the PBGC and off of their financial statements.”
However others say there is no need for crisis talk yet.
“The US$23.3bn [PBGC] deficit is really just a small dent in the US economy,” one consultant said.
Madison Capital Management LLC is a New York-based alternative investment management firm specialising in distressed, real estate and special situations financial assets.
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