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Impact Investing

IPE special report May 2018


S&P says pensions to hit profits at BAE

UK – Ratings agency Standard & Poor’s says that defence equipment firm BAE Systems’ profitability and cash flow are to be hit to “a significant extent” by its pension problems.

“Profitability and cash flow protection ratios are also adversely affected to a significant extent by the pension plans’ deficit and performance,” S&P said in a statement – though it did not provide specific figures.

“The full impact will be quantified once the company's 2002 annual report becomes available,” it added. S&P says that as at the end of last year, the company had a pension shortfall of 2.2 billion pounds (3.2 billion euros). It estimated cash funding requirements at 30 million pounds in 2003 and 60 million pounds in 2004.

S&P lowered its rating to BBB, from A- and removed it from CreditWatch. “The outlook is stable,” it says.

"The downgrade reflects BAE Systems' poor profitability, weak cash flow generation, a decline in historically strong liquidity, and a sizeable pension deficit," said S&P’s Roman Szuper.

BAE were not immediately available for comment.

S&P said on March 20 that it “views unfunded liabilities relating to defined benefit pension plans and retiree medical plans as debt-like in nature”.

“A firm's postretirement obligations affect its financial position and may also be germane to its competitive position,” the agency says. “Most problematic is when peers face different retiree costs.”

It added that the most practical way to start to assess a company’s pension liability is to start with the company's financial reporting, “because of the accessible, timely, and comprehensive nature of financial reporting information compared with other sources”.

But it said analysts should beware the “relatively uncertain nature of accounting for postretirement obligations”.

S&P also affirmed its BB-/B rating on snacks maker United Biscuits, saying that progress on reducing debt had been offset “by rising pension costs and significant unfunded pension liabilities of 194 million pounds.

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