FedEx bond sale shows debt issuance strategy to resolve pension deficits alive and well


A sale of bonds by FedEx FDX,
Tuesday illustrates how blue-chip US corporations are adding debt to their balance sheets to fill gaps in their defined benefit pension plans.

Analysts say the liability shuffle may seem counterintuitive and another example of Wall Street’s propensity for financial engineering, but is in fact an act of caution that cuts overall costs for companies that have to bear pension deficits.

The shipping company issued a $ 1 billion bond with a 10-year maturity with a yield of 3.1%. He also sold a euro-denominated bond of € 1 billion ($ 1.12 billion). FedEx said it would divert some of the funds raised from the debt sale to help close its approximately $ 3.6 billion pension funding gap, according to company documents.

The Pension Benefit Guaranty Corporation, an independent government agency tasked with replenishing the pension funds of bankrupt companies, has increased the insurance fees it charges on unfunded pension liabilities, pushing it well above returns of premium debt. Indeed, FedEx executives benefit from this difference.

The average yield on a basket of corporate bonds issued by well-rated companies stood at 3.21% on Monday, based on an index provided by ICE Data Services. This compares to the PBGC’s 4.3% annual fee.

The substantial savings made by funneling the money from the sale of debt to pension plans “provide a strong incentive for other companies to replicate FedEx trading,” said Hans Mikkelsen, head of investment quality strategy for Bank of America Merrill Lynch in a Tuesday memo. .

Jody Lurie, corporate credit analyst at Janney Montgomery Scott, compared the strategy to the widespread tendency of U.S. tech companies to issue debt to fund their domestic operations, even though they had large stocks of cash outside the US. country. These companies have found it more attractive to borrow in the capital markets rather than remotely repatriating their profits.

See: Why are American companies issuing debt to fill the gaps in pension plans?

Companies sell debt to fund pensions

Bank of America Merrill Lynch

Since the financial crisis, funding levels of private sector pension plans have rebounded more strongly than their state and municipal counterparts.

But the recent drop in long-term interest rates in 2019 has led many company pension plans to forgo their recent advances. The yield of the 10-year Treasury bill TMUBMUSD10Y,
has declined about 60 basis points since the start of the year. Debt prices move in the opposite direction of yields.

Private defined benefit plans had an average funding ratio of 88% last month, although down from their peak of 94% in September 2018, according to actuarial firm Milliman.

“The sharp drop in [the] The funding ratio is problematic because companies are understandably reluctant to make large voluntary pension contributions. However, the collapse in interest rates actually triggers a different incentive to increase pension contributions, ”Mikkelsen wrote.

Attention to pension deficits has diminished in part because of the prolonged expansion of the United States after the recession of 2007-2009. But fears that the United States is entering the latter stages of its business cycle could lead CFOs to take a more proactive approach to managing pension deficits.

“Underfunded pensions were a hot topic that led to the previous recession. Since then, analysts have become more interested in it, so companies want to be more careful, especially when it comes to an upcoming recession in a year or two, ”Lurie said.


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