GERMANY - German industrial conglomerate ThyssenKrupp became the first European company to be downgraded over its pension fund deficit following an earlier warning from credit ratings agency Standard & Poor's.
Thyssen Krupp was lowered to 'BB+/B' status from 'BBB' , rendering it a junk bond. Its short-term rating was lowered from to 'B' from 'A-2'.
In addition, the senior unsecured debt ratings on ThyssenKrupp and guaranteed entities were lowered to 'BB' from 'BBB'.
S&P's credit analyst, Olivier Beroud, said: The rating actions reflect [our] treatment of unfunded pensions as debt-like in character.
Including unfunded pensions in the calculation of the group's indebtedness, credit protection measures are weak, with funds from operations (FFO) to net debt (including pensions) of about 15%, and pension-adjusted debt to capital of more than 60% for the fiscal year ended Sept. 30, 2002.
Unadjusted for pensions, FFO to net debt for the same period was slightly less than 30%, and debt-to-capital was about 45%. Beroud added: S&P expects ThyssenKrupp's credit protection measures to improve slightly in fiscal 2003
Debt reductions are expected to be possible mainly through a continuation of ThyssenKrupp's disposal program. Free cash flow, after capital expenditure and dividend payments, is unlikely to enable the group to reduce debt significantly,
S&P reviewed 500 European companies. The analysis was based on estimates of the value of equity assets in each company's pension fund at the end of 2002, and on the extent of unfunded post-retirement obligations.
Other companies warned over a possible two notch downgrade included J. Sainsbury, BAe Systems and Rolls-Royce.
ThyssenKrupp criticised the decision, saying: ”The Group does not share S&P's assessment that its financial situation has deteriorated since its first rating was issued in summer 2001. The opposite is the case. S&P's decision is incomprehensible.”
“The facts concerning ThyssenKrupp have not changed; the only thing that has changed is S&P's view of the way it assesses pension obligations,” it added.
ThyssenKrupp' said that it would continue to use its defined contribution arrangements which have been in place since the start of the year.
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