General Motors Borrowing Dough to Fund Pension Liability

Friday, February 19, 2016
Posted in category Automobile Industry

The headlines have been going all happy on the Big Three and their record auto sales in 2015. This here is as foolish as it gets:

Those in the automotive industry and pretty much everyone in Michigan needs to step back and appreciate this: For the Detroit Three and anyone involved in the car industry, these are the best of times.

Fiat Chrysler Automobiles said it sold more vehicles than in any year since 2005.

Ford had its best year since 2006.

This is while we have been witnessing what is perhaps a much bigger auto bubble than we experienced pre-2008. The average new car now sells for $33k, which is $6k more than pre-bust in 2005. But people have short memories, and besides, the auto bubble is a whole ‘nother topic.

Government Motors, whose pension plan has been mostly underfunded for 20+ years, has resorted to the issuance of long-term bonds in order to cover some of its underfunded pension liability. Moody’s rated the bonds Ba1, and says Moody’s to justify it:

“GM’s rating could improve if the company remains on its current trajectory for improved performance for 2016 that could support additional positive rating action,” Moody’s said in a statement.

That is meaningless, definition-less gibberish. And intentionally so. The bond issuance is $2B, but back in 2003 GM also did the same with a $17B offering. But it’s not just been GM. A 2012 article in Reuters described the ballooning pension deficits in US corporations and their willingness to borrow to pay down their deficits:

The 100 biggest US pension funds had a combined deficit of $326.8bn last year, pushing up charges to earnings to an all-time high of $38.3bn, according to consulting firm Milliman.

To address their pension liabilities, companies are set to make record contributions into pension funds this year — and many are turning to the debt capital markets to raise the cash.

“We have already seen a number of companies access the debt markets in recent months to finance their pension needs,” said Andrew Karp, head of investment-grade debt syndicate at Bank of America Merrill Lynch.

And it’s not surprising that with the rampant deficit spending of the Bush-Obama years plus the ramp-up in overseas occupation and war carnage, the aerospace and defense industries carry some of the worst pension deficits.

It cited in particular Boeing, Lockheed Martin, Northrop Grumman, United Technologies, Honeywell, Raytheon, General Dynamics and Textron.

Those eight companies ended 2011 with $35bn in unfunded liabilities, nearly two-thirds of the entire $54bn pension deficit for the 55 companies Moody’s rates in the sector.

And of course, the Federal Reserve’s central planning makes the underfunded pension problem much worse because companies have to calculate the present value of their future pension liabilities by using a discount rate that is based on corporate bond yields. The decline in yields forces companies to reduce the discount rate. As those rates fall, the liabilities rise. With the ultra-low interest rates, the value of pension assets is expected to increase much more slowly over time, so more cash needs to be set aside to fund the liability.

In conclusion, the message to take from this is that a mega-corporation that was just recently bailed out by the US government is selling $2B in bonds so that it can spend the proceeds to pay down its existing balance sheet liabilities rather than investing those borrowed funds in profitable undertakings to fund R&D, new engineering, or improve production. And it is multiple government interventions – both monetary and political – that have made the current pension system a high-risk, unsustainable mess that is essentially a pyramid of unaffordable entitlements.


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