EUROPE – Standard and Poor’s ratings agency has said that European financial services companies are not expected to experience ratings changes as a result of post-retirement obligations.
European financial services companies’ 2002 results revealed that the sustained equity market decline had led to pension deficits growing significantly or appearing for the first time. Prompted by the results, S&P has produced a report on the issue.
Despite the fact that net pension liabilities have risen significantly for some European banks and insurers, S&P “does not view pension liabilities as a major ratings factor for most of the European financial services sector”.
“Ratings changes are not expected to be made in the immediate future solely on the back of currently reported pension obligations.”
"Financial services companies, which typically hold large portfolios of marketable securities and short-term liquid instruments, generally have stronger liquidity profiles than industrial companies and are well versed in managing leverage, long-term liabilities, and long-tailed risk - where the bulk of debt falls due in future years," explains Paul Bradley, credit analyst at S&P.
"Increasing pension obligations, however, constitute an incremental negative pressure, which - if they continue to grow - could lead to outlook or ratings changes for companies with material postretirement obligations that are unfunded, insufficiently provisioned, or that are likely to impose a significant strain on future cash flows," points out credit analyst Nigel Greenwood.
S&P says it will continue to closely analyse pension obligations in its assessment of the financial profile of financial services companies.
In the telecoms sector, S&P lowered the ratings of Portugal Telecom from A/A-1 to A-/A-2, due, in part, to its unfunded postretirement liabilities. At 31 December 2002, PT’s unfunded liabilities totalled two billion euros, equivalent to approximately 50% of the group’s net debt.
Moody’s ratings agency also announced today that it is not expecting a large number of downgrades of UK companies that account under IAS based solely on underfunded pension-related issues.
Neale Martin, assistant vice-president and author of the report says, however, that “if equity values continue to decline, causing further deterioration in DB pension plan assets, the cash flows and balance sheets of the scheme’s corporate sponsors could come under significant pressure, reducing financial flexibility and weakening credit profiles, which may lead to future downgrades.”
Moody’s report looks at underfunded pensions obligations when using UK and IAS GAAP financial statements.