Companies face the biggest pension deficit at least since 1994

Companies face the biggest pension deficit at least since 1994 include the sale of bonds in the fastest pace in over seven years to cover the hole betting that future returns will exceed its borrowing costs.

United Parcel Service Inc., the largest business parcel delivery, Dow Chemical Co., Northrop Grumman Corp. and PPG Industries Inc. sold at least $ 5,250,000,000 U.S. bonds business investment grade in November to fund their pensions, which is the busiest month since June 2003.

The effort of the Federal Reserve to keep interest rates low to stimulate the economy has led to the obligations of the pension companies, which are linked to bond yields to increase by 105.8 billion U.S. dollars this year to $ 1.44 trillion October, according to Milliman Inc. Now, companies are taking advantage of borrowing costs in the lowest on record as Goldman Sachs Group Inc., said that interest rates will rise as the economy recovers world.

"They are fighting fire with fire," said John Lonski, chief economist at Moody's Capital Markets Group in New York, in a telephone interview. "They are victims of low bond yields, why not go ahead and use them as compensation?

yields of investment grade corporate bonds, which is used as a reference for determining the future of corporate responsibilities to retirees, fell to 3.53 percent on Nov. 4, the lowest in the history, Bank of America Merrill Lynch index data show.

Refuse to finance

the pensions of companies in 500 of Standard & Poor's with about $ 1 trillion in assets are 77 percent funded this year, down from 82 percent in late 2009, Bank of America, Merrill Lynch said in a report dated 29 October. Few, if any, borrowers have had their credit ratings cut to the issuance of debt to finance pension obligations, said Lonski.

Yields can not move substantially higher in the coming years, he said. "They're willing to bet that future returns will exceed the actual cost of debt," he said.

Elsewhere in credit markets, the extra yield investors demand to own company rather than government bonds of similar maturity debt rose 1 basis point to 170 basis points, or 1.7 percentage points, the highest since 7 Global October according to Merrill Lynch Bank of America general corporate market index. The average yield of 3.714 percent.

The cost of insuring bonds sold by Portugal and Spain rose to records of the concern of the European Union and International Monetary Fund bailout of Ireland could not stop the fiscal crisis from spreading. Swaps credit-default in Spain rose 3.5 basis points to 303 while contracts linked to Portugal's debt increased 13 basis points to 489.

Swaps credit-default pay the buyer face value in exchange for the underlying securities or the cash equivalent of a company or country do not adhere to its debt agreements. A basis point on a contract protecting $ 10 million debt from default for five years is equivalent to $ 1.000 a year.

Bank of Ireland Bonds

Debt of the largest lenders in Ireland fell amid speculation the government will force the bondholders to share the high cost of the nation's 85 million euros (113 billion) rescue.

Allied Irish Banks 750 million euros Plc 5.625 percent notes due in 2014 fell 7 cents on the euro at 70 cents, down 9 percent, according to composite prices. Bank of Ireland 974 million euros from 4,625 percent senior unsecured notes due 2013 fell 4.3 cents on the euro, or 5 percent, to 80.5 cents.

Deutsche Bank AG, Germany's biggest lender, raised ¥ 80,000,000,000 ($ 954,000,000) of Samurai bonds as the Polish government postponed the sale of securities, citing "volatile" markets debt.

Samurai Bonds

Frankfurt-based Deutsche Bank sold ¥ 28,200,000,000 Floating Rate Notes of three years, giving 30 basis points above the London interbank offered rate three-month yen and 51.8 billion yen in five-year notes 0.95 percent to yield 30 basis points more than the yen swap rate.

Poland plans "to issue Samurai bonds in the near future when the market situation becomes more stable, allowing better pricing for our theme," wrote the deputy finance minister Dominik Radziwill in an e-mailed response to questions . borrowing costs in the nation rose to a maximum of five months in a sale of 10-year bonds last week as the debt crisis of Europe curbed demand for longer-term notes. Samurai bonds are yen-denominated bonds sold in Japan by foreign borrowers.

KKR & Co. and its partners are committed debt financing from four banks to support the acquisition of Del Monte Foods Co., maker of canned fruits and pet food, according to a statement yesterday.

Bank of America, Merrill Lynch, Barclays Capital, JPMorgan Chase & Co. and Morgan Stanley in arranging funding, joining KKR Capital Markets LLC. KKR, Vestar Capital Partners and Centerview Partners agreed to pay $ 19 per share in San Francisco Del Monte. The valuation of 5.3 billion U.S. dollars includes $ 1.3 billion debt of Del Monte.

Pension deficit

The pension deficit is 380 billion U.S. dollars the highest since at least 1994, David Bianco, chief equity strategist U.S. at Bank of America Merrill Lynch in New York, said in the report last month.

The Fed has kept its benchmark rate in a range from zero to 0.25 percent from December 2008 to stimulate the economy and reopen credit markets after the credit takes worst since the Great Depression. This month the central bank said it will buy more Treasuries to maintain low interest rates low and avoid deflation.

Goldman Forecast

Goldman Sachs team expects that the rates of Treasury bonds with longer maturities up "in the economic recovery, both in the U.S. and the world, and the normalization of the expectations of U.S. inflation ., "wrote strategists Charles Himmelberg, Alberto Gallo, Lotfi Karoui and Annie Chu in a November 19 report. The yield on the benchmark 10-year Treasury increased to 3.3 percent by late next year, the New York-based firm said.

The benchmark return of 10-year Treasury was at 2.87 percent today from 2.9 percent late last week and compared with a low this year of 2.38 percent on 07 October.

"If you really believe that rates are rising, should be the issuance of debt," said Gordon Latter, managing director of RBC Global Asset Management in Minneapolis. The latter said his company plans that customers issue bonds to help cover the pension deficit.

The difference between pension assets of the 100 largest company and its projected liabilities has improved over two months after the extension by 108 billion U.S. dollars in August to a deficit of 459.8 billion U.S. dollars, the largest deficit of at least a decade, actuarial and consulting firm based in Seattle Milliman said in a statement.

Rate of Return

Pension plans have a median of 8.1 percent expected rate of return, Milliman said. During the past 12 months, assets in the plans returned 11.4 percent, while state funding declined 21 billion U.S. dollars, "primarily due" to the lower discount rates.

Get a return of 8.1 percent is "very difficult" since the last bond yields, "said Ashish Shah, co-head of global lending at AllianceBernstein LP in New York.

"Probably would have to take a greater amount of risk that most plans get comfortable with that kind of change today," Shah said in a telephone interview.

The S & P 500 has gained 9.4 percent this year, including reinvested dividends. U.S. corporate bonds have returned 9.9 percent, and Treasury bonds have handed investors a 7.2 percent, according to data from Bank of America Merrill Lynch index.

Less flexibility

While replacing a pension liability in corporate debt may reduce volatility, the bond issue may limit the financial flexibility of the company, said Jon Waite, a director and chief actuary for SEI investment manager, which oversees more of $ 164 billion in assets in Oaks, Pennsylvania.

"It's a real balancing act for the" chief financial officer, Waite said in a telephone interview.

Companies are also using their cash reserves to fund pension obligations because they are skittish about economic growth and are unwilling to hire more workers or invest in their businesses, said Tom Meyer, head of client portfolio management at headquarters in Chicago, Legal & General Investment United States, which oversees about $ 18 billion.

"It is not surprising that contributions to the plans have been produced at a very serious and significant," Meyer said in a telephone interview. "The issuance of bonds to fund pension plans, which seems opportunistic."