NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Defense Contractors' Pension Deficits on the Rise
https://www.fitchratings.com/site/re/890629
While U.S. defense contractors' already large pension deficits will likely further deteriorate in 2016, Fitch Ratings does not view this as a near-term rating concern. The cash flow impact over the next three to four years from the large underfunded pension liabilities is mostly mitigated by lower funding requirements and increasing reimbursements from the U.S. government.
Fitch anticipates interest rates utilized to calculate pension benefit obligations (PBO) discount rates will decline again in 2016, further pressuring PBO, but will remain credit neutral largely due to higher expected pension related cash inflows for defense contractors. Driven by the changes in accounting rules enacted in 2012, Fitch anticipates reimbursements from the U.S. government will continue to increase through 2017 and will remain elevated thereafter, providing a significant benefit to U.S. defense companies.
Underfunded PBO could become a long-term rating concern. Fitch believes the funding relief provided by recent pension-related laws and corresponding lower contributions may translate into a significant funding gap, as U.S. defense contractors may face significant pension deficits should low interest rates prevail when funding relief fades.
The significant deterioration of the pension deficits was mainly driven by low rates, which have derailed the companies' efforts to address the mushrooming pension liabilities with significant contributions. Fitch has observed a total deterioration of industrywide underfunded PBO (Fitch defined: 10 Largest U.S. public defense and security companies) by $17.5 billion from year-end 2010 to year-end 2015 despite a total of $28.5 billion contributions to pension plans during the same period.
Fitch does not anticipate defense contractors will make sizable discretionary pension contributions over the next three to four years even though the required contributions will increase significantly for some defense contractures in 2017 and 2018. Most defense contractors do not need to make large minimum required contributions in 2016, indicating nearly full to full-funded status on an ERISA basis.
While U.S. defense contractors have frequently accessed capital market to make debt-funded discretionary pension contributions, Fitch does not expect downgrades arising from deficit-funding transactions for U.S. defense contractors.
For more information, see Fitch's new report, 'Defense Contractor's Pension Deficits on the Rise' at www.fitchratings.com.
Additional information is available on www.fitchratings.com
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