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BAE, Sainsbury and Rolls 'face pension threat to credit ratings'

Katherine Griffiths,Banking Correspondent
Saturday 08 February 2003 01:00 GMT
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J Sainsbury, BAE Systems and Rolls-Royce may see their financial rating slashed because of fears of growing deficits in their pension funds, Standard & Poor's warned yesterday.

Pilkington, the glassmaker, and the engineering group GKN were also on S&P's danger list.

The ratings agency said it was considering downgrading the companies, along with a number of French and German businesses, because it believes they will have to find extra cash to pour into the pension funds after their assets have been eaten away in the last 12 months by falling equity markets.

A spokesperson for S&P said: "None of the companies face a liquidity risk, but there are potential cash flow and balance sheet liabilities." S&P said it viewed unfunded pension liabilities as similar to debt, because the liabilities represent a similar future call on cash because the companies in question have run final salary schemes, which work on the basis of offering fixed pay-outs to fund members.

The agency added that there was a growing risk of companies having to use increasingly large amounts of cash to make up the shortfall in pension schemes .

Only one company, the German steel maker Thyssen-Krupp, is at risk of seeing its rating fall to junk status if S&P decides to cut the companies' ratings in coming months. However, downgrades would mean all companies on its list would find it more expensive to borrow money because interest repayments would be higher.

Rolls-Royce said in August that it had a £700m deficit in its pension fund, requiring extra payments into the fund of £50m a year. The deficit may well be seen to have increased since then when it publishes its annual results on 4 March.

The company insisted the pension liability was manageable. A spokesperson said: "The maximum impact would be that interest repayments could increase by less than £1m a year, which would be minimal."

Sainsbury, with a £2.1bn pension fund, said last March that its fund had a deficit of £257m under the FRS17 accounting method. It warned this could reduce profits by £15m this year.

The S&P note came after Fox-Pitt Kelton said on Thursday that UK banks have seen £15bn wiped off their pension assets in 12 months. Separately Morgan Stanley estimated that Rolls-Royce, BAE Systems and Royal & SunAlliance had the biggest pension deficits as a percentage of market capitalisation.

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