US - Pensions liabilities are responsible for 13 US companies being placed on negative CreditWatch by Standard & Poor's ratings agency.
The CreditWatch reviews reflect concerns about the companies’ exposure to unfunded liabilities for defined benefit pensions payments, and retiree medical liabilities.
The companies concerned include Alcoa, Caterpillar, Consol Energy and Kimberly-Clark. Reduced funding levels are the result of stock market declines and lower interest rates.
Without a dramatic reversal in the fortunes of stock markets and interest rates, companies will be obliged to dedicate a greater portion of their cash flow to fund their benefit obligations, said S&P.
Other companies’ ratings are also under scrutiny due to pensions liabilities, including some which were already on CreditWatch for other reasons, but are now to be reassessed, and four companies whose ratings outlook is to be reassessed. The majority of the reviews are expected to be completed with the next few weeks.
Unfunded post-retirement benefit obligations are debt-like in nature owing to the call on future cash flow they represent. The obligations are difficult to quantify and volatile due to their dependence on investment performance, said S&P.
In a parallel move ABN Amro has reviewed European companies to assess which of these might be subject to downgrading due to sensitivity to pensions liabilities.
Its list excludes 12 European companies, the so called “dirty dozen”, already placed on negative CreditWatch by S&P in February. ABN Amro placed 10 companies in the medium to high exposure category (see table).
ABN Amro noted that since European assumptions were less aggressive than those used in the US, European companies are less exposed than US companies to deterioration in unfunded pension liabilities by changes in those assumptions.
ABN Amro is critical of S&P’s methodology.
“S&P is not consistently applying its pension assessment methodology and there are widening variations in the subjective assessments of its analysts,” said an ABN Amro report.
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