$26 billion unfunded liability won’t stall GM IPO, experts say

$26 billion unfunded liability won’t stall GM IPO, experts say

By Timothy Inklebarger
Source: Pensions & Investments
Date: August 23, 2010

 

 

Knowing: Mark Oline said GM’s pension plan underfunding is not a surprise to investors.

Updated with correction

General Motors Co.’s $26.3 billion unfunded pension liability is unlikely to affect its upcoming IPO, rating agency analysts say.

“Every automaker has underfunded pensions,” David Whiston, an equity analyst with Morningstar Inc., Chicago, said in a telephone interview. “It’s not as if it will scuttle the deal.”

According to the Aug. 18 initial public offering filing with the Securities and Exchange Commission, the U.S. pension plans had a $16.7 shortfall as of June 30, down 2.3% from six months earlier and down 14.3% from July 10, 2009.

Noreen Pratscher, a GM spokeswoman, said the U.S. hourly plan is 80% funded; the U.S.salaried plan, 89% funded as of Sept. 30, 2009.

Its non-U.S. pension plans had an unfunded liability of $9.6 billion on June 30, down 6.8% from six months earlier and down 24.4% from July 10, 2009.

The plans’ assets were valued at a combined $98.5 billion as of Dec. 31, 2009, according to the IPO filing.

Mark Oline, group managing director and head of corporate finance group at Fitch Ratings, New York, agreed the underfunded status “has been well known for some time” and that it will not hold up the IPO, but he added that the economy is in a longer-term period of low yields, which will pose challenges for companies achieving their assumed rates of return.

“Almost certainly a higher level of contributions will be required to close those underfunded positions,” Mr. Oline said in a telephone interview.

He said securities holders in GM, in equities and fixed income, “will be focused on the extent of those claims on cash flow.”

Mr. Oline said prior to filing for Chapter 11 reorganization and bankruptcy protection on June 1, 2009, GM did a “fairly impressive job” of managing its pension funds, increasing its fixed-income exposure to its U.S. plans to 57% by Dec. 31, 2008, from 32% in 2006.

“It experienced some capital gains, while the equity side experienced losses,” he said.

Mr. Oline said while GM’s funded status is better than some other corporate and public plans, the $26.3 billion liability is the issue.

“In absolute dollars that represents a material level of cash contribution required to close the gap,” he said.

In its IPO filing, GM noted that “as of June 30, 2010, we have no expected material mandatory pension contribution until 2014.”

Federal filings show GM plans to contribute $95 million to its U .S. plans in 2010 and $355 million to its non-U.S. plans.

Despite the company’s troubled history, Morningstar’s Mr. Whiston gave a positive outlook for the GM IPO.

His report on GM from June 7 said establishment of a voluntary employees beneficiary association for members of the United Auto Workers earlier this year was the most critical cost-savings measure the company undertook during its Chapter 11 proceedings.

Before the VEBA, GM paid an average of roughly $80 per hour per worker in salary and benefits, Mr. Whiston said in an interview. Foreign automakers, by contrast, pay about $45 to $50 per hour, he said.

“That gap was getting bigger and bigger because of the health-care costs,” Mr. Whiston said.

Post-VEBA, GM dropped its per-worker costs by roughly $20, he said.

Mr. Whiston said in the report that the VEBA is projected to save GM about $3 billion a year “and other wage and benefit concessions have drastically lowered (General Motors North America’s) break-even point.”

GM’s IPO states that U.S. industry sales must range from 10.5 million to 11 million vehicles for GM North America to break even.

“We think the normative demand for U.S. light-vehicles is 14 (million) to 16 million units, so we expect GM to be printing money as vehicle demand comes back over the next few years,” Mr. Whiston said in the report.

Potential investors in GM’s IPO, meanwhile, will be looking at whether GM can regain market share, said Linda Killian, principal of Greenwich, Conn.-based Renaissance Capital LLC.

“In the prospectus, it did not have a price range in it. It didn’t have how many shares. It’s too early to say whether you should be buying it. The issue is if you believe the GM story and that we’re at the bottom of the cycle. If you want to have exposure in the auto space, then it becomes an issue of valuation,” Ms. Killian said.

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