The Bush Administration's proposed reforms for defined-benefit pension plans could add financial pressure to high-yield companies, bump up the default rate and lead to ratings downgrades. The proposal is to use credit ratings to determine a company's contributions to pension plans and Pension Benefit Guaranty Corp. premiums, thereby placing a greater burden on those least able to afford it.
Kate Kutasi, manager in distressed at money manager Kellner DiLeo Cohen & Co., says the default rate will pop if companies are unable to handle increased costs. As the specifics of the reforms are still unknown, she declined to speculate on how much the default rate could increase.
Market participants say if the proposal is enacted, it will add even more weight to the delineation between investment-grade and junk. Gregory Clifton, v.p. at Moody's Investors Service, said, "If a company is borderline and then a downgrade occurs, now they'll have increased funding requirements." The Bush Administration has not specified which rating agencies it would depend on.
To be sure, no legislation has yet been presented and details remain scarce. Any legislation would likely be pushed later this year after the more pressing problem of Social Security reform is addressed.
