Future of Eastman Kodak’s Pension ‘Too Early to Tell’ Says PBGC

"Some people say that Eastman Kodak's pension plan is in danger because the company filed for bankruptcy, but it's really too early to tell," says PBGC spokesman Marc Hopkins.

(January 20, 2012) — The Pension Benefit Guaranty Corporation (PBGC) — the federal agency, which assumes the pension liabilities of companies in bankruptcy — has asserted that concerns over the future of Eastman Kodak’s pension scheme following the firm’s bankruptcy is premature, due to the scheme’s reasonable funding level.

“Some people say that Eastman Kodak’s pension plan is in danger because the company filed for bankruptcy, but it’s really too early to tell,” PBGC spokesman Marc Hopkins told aiCIO, referring specially to the Rochester, NY-based firm’s US scheme. “If the result of the bankruptcy process is that Kodak cannot afford their pension plan, we would step in and take on pension liabilities, paying benefits up to the guarenteed limit,” Hopkins said, noting that the action is only hypothetical, as the PBGC’s action would evolve over the course of the bankruptcy, which could take at least 18 months.

Hopkins referenced Visteon Corporation, a global supplier of climate, electronics, lighting and interior products, which went through bankruptcy, reorganized, and kept its plan intact — emerging from bankruptcy on October 1 of 2010 with an improved balance sheet.

PBGC issued a statement saying: “Kodak’s US pension plans are reasonably well funded and we want to make sure they stay that way. We will actively participate in Kodak’s bankruptcy to protect Kodak’s pension plans for their workers and retirees.” According to the PBGC, Kodak sponsors two traditional pension plans that cover nearly 63,000 people. The plans are 86% funded, with about $4.9 billion in assets to cover about $5.6 billion in benefits.

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Kodak filed for bankruptcy protection early Thursday morning, aiming to streamline and improve its business. In a video with WXXI Public Television, Antonio M. Perez, the company’s chief executive, said: “We’re taking this step at this point in our transformation in order to build the strongest possible foundation for the Kodak of the future.”

Some sources conclude the Chapter 11 filing came as a call for help before the firm ran completely out of cash, as the company already owes a growing amount to creditors.

In 2011, PBGC worked with 19 companies in bankruptcy to continue their pension plans after the sponsor reorganized, or after a new owner assumed operations. Their pension plans cover about 74,000 people, who will receive their full promised benefits. This kept more than $2 billion in obligations off the agency’s books. Perhaps not surprisingly, the fund has been pummeled in recent years by the economic downturn which has caused more corporate bankrupts and pension failures.

While Hopkins said it’s too early to assess the impacts of Kodak’s bankruptcy on its pension, the Chapter 11 filing may be a further indication of the increased pressure the PBGC faces as more corporate bankruptcies and pension failures contribute to its widening deficit.

(January 20, 2012) — Downgrading a country’s debt has little impact for investors or issuers, a paper by F&C Investments has concluded a week after rating agency Standard and Poor’s took action on several European nations.

The act of reducing a county’s status is often a reaction to what has been happening to its debt in the wider market already, F&C’s Liability Driven Investments bulletin reported.

It said: “Ratings agencies were slow to react at the onset of the credit crunch; so to an extent whilst credit ratings are meant to be forward looking they may, in certain cases, be lagging indicators, whereas a more sensitive market implied measures such as credit spreads may have reacted earlier and reflected a change in the perceived creditworthiness.”

A week ago, S&P downgraded a series of Eurozone countries including France, which lost its triple A rating, which should have pushed their sovereign debt yields up due to their more risky status. In fact there was little immediate reaction on bond markets, and in some cases the yield on bonds issued by the effected countries actually went down, signalling more confidence and appetite from investors. This was also the case when S&P withdrew the United States’ AAA rating last summer.

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The F&C paper said: “In the case of countries like Italy, spreads on their government debt relative to Euro denominated swaps, which is a measure of Italian sovereign credit risk, had already started to widen at the beginning of 2011 even though Italy was not formally downgraded by Moody’s until September 2011 from Aa2 to A2.”

The asset manager’s paper added that over the longer term external factors played a larger part in the movements of the bond’s yield than the removal of a top rating.

Fears of institutional investors dropping the securities following a downgrade were also overblown, according to the paper. It said that while some funds may have to sell out of bonds that no longer were of an acceptable the grade to its terms and other investors needed higher grade bonds to use as collateral, situations were usually adaptable.

The paper said: “Institutional investors often start selling sovereigns about to be downgraded much before the event such that the rating downgrade itself does not constitute a significant market event. Likewise, we have seen derivative clearing firms raise the margins required on sovereign debt in response to price volatility rather than ratings downgrade. Similarly, credit ratings restrictions are not always set in stone and often common sense prevails. For example, the European Central Bank historically has only accepted investment grade sovereigns as collateral for capital raising purposes.”

However, earlier this week, market monitor Data Explorers said demand for high quality sovereign bonds to use as collateral had pushed the level of AAA-rated European countries’ bonds out on loan to record levels.

<p>To contact the <em>aiCIO</em> editor of this story: Elizabeth Pfeuti at <a href='mailto:epfeuti@assetinternational.com'>epfeuti@assetinternational.com</a></p