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Pension Underfunding Strains U.S. Auto Suppliers
NEW YORK -- Ever since the historically large downturn in auto sales in 2009, auto suppliers have significantly reduced their cost structures by consolidating manufacturing facilities, streamlining business processes, cutting staff, and focusing on core businesses. From an operational point of view, many U.S. auto suppliers are much better situated to withstand future falloffs in demand.
But as a consequence of falling interest rates, however, unfunded pension liabilities have risen for many companies, including those in the auto industry, said Standard & Poor's Ratings Services in a report titled, "Rising Pension Underfunding Is Weighing On U.S. Auto Suppliers' Credit Metrics," published on RatingsDirect.
Standard & Poor's regards pension and other post-employment benefits (OPEB) underfunding as debt-like obligations. In our opinion, large funding deficits can place an issuer at a disadvantage compared with other companies, and we expect this will continue to be a factor in our ratings analysis.
"In 2011, a further decline in the discount rates U.S. corporate entities use to calculate their year-end defined benefit pension plan obligations, coupled with lower-than-expected returns on pension plan assets, fueled a significant increase in overall corporate pension plan underfunding, including the auto suppliers sector," said Standard & Poor's credit analyst Leonard Grimando.
Larger underfunded balances, higher pension costs, and potentially higher future cash contributions continue to place pressure on companies' liquidity and credit metrics. Results for individual companies within the sector, however, have varied depending on interest rate assumptions, actual asset returns, and the amount of 2011 contributions.
Published by The BUsiness Journal, Youngstown, Ohio.