Borrowing to Fund Beneficial in Today’s Economy

Despite a recent rise in interest rates, borrowing to fund remains a compelling strategy. A borrow-to-fund strategy can also create shareholder value, and here’s how:

  • Nix the unknown—When borrowing to fund pension plan shortfalls, companies replace a variable and potentially volatile debt obligation with a known, certain amount of debt with fixed coupon and principal payments—potentially saving the company millions.

Shows the economic benefit that borrowing to fund can generate for companies across a range of credit ratings and funding period

Table caption: Economic Benefit in millions of a Borrow-to-Fund Strategy by Credit Rating and Debt Tenor

Table summary:

Shows the economic benefit of a borrow-to-fund strategy by credit rating

Issuer Credit Rating

5 Year Funding Period

10 Year Funding Period

AAA

$104 million benefit

$217 million benefit

A

$97 million benefit

$191 million benefit

BBB

$78 million benefit

$150 million benefit

BB

$51 million benefit

$104 million benefit

Assumes a $7B plan that is 85% funded, from “Borrowing to Fund Pensions Could Enhance Shareholder Value.” Read our white paper for all assumptions.

  • Premium rates on the rise—Pension Benefit Guaranty Corporation (PBGC) variable premium rates are scheduled to go up to at least 4.2% of unfunded liability in 2019 – potentially costing the company millions. Plus, the estimate of unvested pension liability, which is used to calculate variable premium, will increase next year when the IRS adopts a new mortality basis (RP-2014 with scale MP-2016).

Shows that a borrow-to-fund strategy yields a net present value (NPV) economic benefit of $150 million, compared to a pay-over-time strategy

Table caption: Ten-year cost of a pay-over-time vs. borrow-to-fund strategy

Table summary:

Shows the $150 million NPV economic benefit of a borrow-to-fund strategy

Pay Over Time

Borrowing to Fund

$795.9 million NPV cash flow

$645.9 million NPV cash flow (a $149.9 million savings)

Source: BBB-rated company; $7B plan; 85% funded, from “Borrowing to Fund Pensions Could Enhance Shareholder Value.” Read our white paper for all assumptions.

  • When rates rise, issuing debt has benefits—The United States is among the highest yielding countries in the developed world, with 10-year rates in Japan and Germany still hovering near 0%. Slower growth in the rest of the world, as well as continued demand for long-dated bonds from pension funds, will continue to pressure U.S. rates. At the current interest rate level, a borrow-to-fund strategy remains a viable option for sponsors.

 

Potential for lower tax rates prompting accelerated contributions

A borrow-to-fund strategy may be more beneficial now while the corporate tax rate is high and interest expense is deductible. That’s why many sponsors are accelerating pension contributions and some are even issuing debt to fund them.

Growing interest in borrowing to fund

Since the start of 2017, several notable plan sponsors have issued debt for this specific purpose, including FedEx Corp. ($1 billion), Delta Air Lines ($2 billion), Verizon ($3.4 billion) and DuPont ($2 billion). This comes on the heels of a robust second half of 2016, when more than $3.2 billion of pension contributions were made using a borrow-to-fund strategy.

Company

Debt Issuance(1)(2)

Related Plan Contribution(1)

Amount

Date

DuPont Company

$2,000

5/1/2017

$2,000

Verizon Communications Inc.

$6,500

3/16/2017

$3,400(3)

Delta Air Lines

$2,000

3/14/2017

$2,000

FedEx Corp.

$1,200

1/6/2017

$1,000

Northrop Grumman Corp.

$750

12/1/2016

$20

CSX Corp.

$2,200

10/18/2016

$220

Altria Group, Inc.

$2,000

9/16/2016

$500

Cox Communications, Inc.

$1,000

9/13/2016

Not disclosed(4)

Premier Health Partners

$300

8/31/2016

Not disclosed(4)

International Paper Co.

$2,300

8/11/2016

$500

General Motors Company

$2,000

2/23/2016

$2,000

 

Company

Debt Issuance(1)(2)

Related Plan Contribution(1)

Amount

Date

DuPont Company

$2,000

5/1/2017

$2,000

Verizon Communications Inc.

$6,500

3/16/2017

$3,400(3)

Delta Air Lines

$2,000

3/14/2017

$2,000

FedEx Corp.

$1,200

1/6/2017

$1,000

Northrop Grumman Corp.

$750

12/1/2016

$20

CSX Corp.

$2,200

10/18/2016

$220

Altria Group, Inc.

$2,000

9/16/2016

$500

Cox Communications, Inc.

$1,000

9/13/2016

Not disclosed(4)

Premier Health Partners

$300

8/31/2016

Not disclosed(4)

International Paper Co.

$2,300

8/11/2016

$500

General Motors Company

$2,000

2/23/2016

$2,000

Table caption: Shows a number of companies who have issued to debt to fund a pension plan between 2016 and 2017
Table summary: Shows a number of companies that have issued debt and contributed some or all of the proceeds to funding the pension plan. The amounts, dates and related plan contributions are provided.

In USD millions


Plan sponsors should evaluate the economics of a borrow-to-fund transaction to evaluate if it fits their company’s pension-funding strategy. For more information on this topic, please read our whitepaper, “Borrowing to Fund Pensions Could Enhance Shareholder Value.

REFERENCES

  • 1 Company filings.
    2 Debt issued to fund pension contributions and / or for general corporate purposes.
    3 Contribution per company’s fiscal 1Q 2017 earnings call dated April 20, 2017.
    4 Private company that does not issue public financial statements. Intended use of proceeds from Fitch rating report dated 8/10/16 and 9/8/16 for Premier Health Partners and Cox Communications.