President Joe Biden’s pension bailout might do more than just support troubled retirement plans. It could also spur tens of billions of dollars in demand for corporate bonds with the lowest investment-grade ratings, according to Citigroup Inc.
Struggling multi-employer pensions, which are often tied to unions, will be able to apply for special financial assistance, thanks to the $1.9 trillion pandemic-relief bill signed into law in March. Pension Benefit Guaranty Corp., which insurers the plans, will make a single lump-sum payment to eligible funds.
Citigroup estimates that roughly 230 pensions will be eligible to receive $86 billion as early as 2022, though the amount may change when the pension insurer releases application guidance in July, strategists Daniel Sorid and Jason Williams said in an interview. The plans will have to invest the money in high-grade bonds or other securities approved by the agency.
The strategists said pension managers may try to extract as much yield as possible by loading up on bonds in the lowest investment-grade rung, which yield 2.46% on average, versus 2.23% for the broader market. Existing funds could get reallocated into riskier investments like stocks, they added. But in credit, the new demand may entice companies rated BBB to issue longer-dated paper than they usually do and flatten the curve for bonds maturing in 10 years and 30 years even further.
“If there was ever a time when the 30-year credit should be having its moment in the sun, it’s now,” Sorid said.
Multi-employer plans were hit hard early in the pandemic, with plunging markets resulting in the biggest quarterly deterioration in how well they were funded since 2007, according to a report from actuarial firm Milliman. But the market’s subsequent rally boosted the funding percentage to 88% at the end of last year from 85% a year earlier, according to Milliman’s report. However, many are far less funded than that.
“This keeps many, many funds alive that would have gone to the PBGC to pay those benefits in the next 10 years or so,” Sue Crotty, a senior vice president at Segal Marco Advisors, said. “It’s very good news for the participants.”
How much Biden’s rescue sways the bond market may depend on PBGC’s final guidance in two months. When pensions apply — they have until the end of 2025 — and PBGC ships out the money will guide that impact.
PBGC may in July clarify what it considers “other investments” that it’ll permit plans to invest in alongside investment-grade bonds. While it’s easy to expect this recommendation to be conservative, JPMorgan Asset Management’s Jared Gross suggests that giving plans flexibility to buy things that eke out higher returns could be beneficial in the long run.
“The devil is in the details,” said Gross, head of institutional portfolio strategy at JPMorgan Asset Management. “My hope is that the plans will be given some amount of flexibility, hopefully with the new capital but certainly with respect to their existing capital, to take steps to achieve the right level of risk-adjusted returns so that this actually can be successful over the long horizon and it’s not just a short-term fix.”
Alibaba Group Holding Ltd.’s revenue beat estimates after China’s e-commerce leader rode a post-pandemic recovery and begins to move past a bruising antitrust investigation
- As cash balances have risen toward $70 billion, financial flexibility may enable Alibaba to endure a prolonged period of macroeconomic uncertainty related to the coronavirus, as well as regulatory risk, better than hardware-centric technology peers, write Bloomberg Intelligence credit analysts Robert Schiffman and Suborna Panja
- Four issuers are selling new debt in the investment-grade market on Thursday. While volatility in macro markets has made the decision to bring new issuance more difficult this week, it hasn’t significantly crimped sales
- In high-yield, Goodyear Tire & Rubber Co. is raising $1.45 billion to help fund the cash portion of the consideration for the acquisition of Cooper Tire & Rubber Co.
- Auction house Sotheby’s is marketing $300 million of notes that will fund a holder distribution
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
Inspired Entertainment looks set to be the only issuer to price a transaction on Thursday as a public holiday across much of Europe curbed most supply in euros. Dana Financing is offering a 325 million-euro note that may price on Friday.
- Banks are lobbying the European Central Bank to extend temporary capital relief granted during the pandemic to keep credit flowing to fragile economies
The primary Asian dollar bond market was quiet on Thursday with no fresh deals.
- China Huarong Asset Management Co. said it’s prepared to make future bond payments and has seen no change in the level of support it receives from China’s government, after local media reported that regulators had balked at the company’s restructuring plan.
- Concerns about Huarong had pushed out Asian dollar bond spreads in April, and how it handles future debt payments will be a key issue for the regional market
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