Pension reforms could actually put a serious damper on credit, despite the popular view they would just increase demand for longer-dated paper. "People aren't paying enough attention to the credit side and cash demands on companies," said Trevor Harris, managing director at Morgan Stanley, who noted the credit quality of companies will worsen as they are likely to incur significant cash outflows in the near term for under-funded plans. Brad Belt, executive director at the Pension Benefit Guaranty Corp., predicted rating downgrades will result and highlighted the auto, airline and steel industries as problematic. Both officials argued these negative side effects have been largely overlooked and instead market participants have focused on how demand for longer assets could increase.
Furthermore, Belt noted the PBGC is backing proposed reform that would increase its seniority in a company's capital structure, irregardless of other creditors' dismay. "We're general unsecured creditors, we get the crumbs on the table," he said, adding the PBGC's recovery in bankruptcy is typically just seven cents on the dollar.
