Monday, 16 July 2018

International Paper gets demand for 31-year pension funding bond

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International Paper saw enthusiastic investor demand when it raised US$1bn on Monday to help fund its pension liabilities, following in the footsteps of Kroger and DuPont, which recently took similar steps.

That kind of funding requires longer tenors, and the company, rated Baa2/BBB, picked the right time to come to market with its new 31-year bonds. Spreads on Triple B paper recently hit a post-crisis tight of 137bp over Treasuries, although they widened out to 139bp Monday.

International Paper was rewarded with investor orders of US$2.4bn, and a new issue premium of only 1bp.

International Paper priced its 31-year slice at Treasuries plus 145bp, just 1bp over its outstanding 4.40% 2047s, which had been trading at 144bp. The issuer was able to squeeze in pricing by 15bp from initial talk, and dropped a 3NC1 floater.

Investors tend to like bonds from companies who want to fund their pension liabilities because it is seen as a credit-neutral event, a DCM banker said.

“It’s a source of supply that doesn’t lever the company up,” he said.

Companies at the lower end of the investment spectrum are seeing more opportunity to issue tenors over 30 years in general, a second DCM banker told IFR.

“That part of the curve isn’t always open to weaker, Triple B borrowers - certainly not to the extent that it is today,” he said.

Such access, along with the flatness of the credit curve, is driving some borrowers with pension liability needs to come to market now, he said.

There are other factors involved. Companies like International Paper have looking to the debt markets to sidestep insurance premiums the Pension Benefit Guarantee Corporation requires them to pay on liabilities, which have almost quadrupled in recent years.

“Premiums have been going up as credit spreads have been tightening,” the first DCM banker said. “So the cost of putting money into pensions has been going down - while the cost of leaving pensions unfunded has gone up,” he said.

International Paper’s latest US$1.25bn voluntary contribution is its biggest yet, and its PBGC premiums, which run at 4% annually, will be reduced by about US$35m-$45m per year after the contribution, CFO Glenn Landau said on a conference call Monday.

In addition, any contribution to the pension is considered debt reduction by the agencies, and the US$400m cash tax benefit from the contribution is now locked in prior to any potential reduction in corporate taxes, he said.

“These many benefits are significantly higher than the … after-tax cost of the debt issued today,” Landau said on the call.

While the prospect of meaningful tax reform is considered increasingly slim, it is another factor causing companies with hefty pension liabilities to consider prefunding while rates are low. When companies contribute money to their pension funds, they get a tax reduction.

“It’s always a prudent move to address dramatically underfunded pension plans, but probably even more so now in light of uncertainty about corporate tax rates and the likelihood of higher interest rates down the road,” Carol Levenson, analyst at Gimme Credit, said.

And companies with pension funds have never been in a better position to derisk. The long run in the stock market has created a window where funded status is in sight, Mark Howard, head of US credit strategy at BNP Paribas, said.

“That makes [bond issuance] more compelling when you’re in the scoring range to do this and be in a position to derisk your pension plan,” Howard said.

Once the pension plan is at funded status, companies can sell it and transfer it to an insurance company. That would be looked upon favourably by ratings agencies, and increasingly shareholders and boards of directors.

On Monday’s call, Landau said the company saw the transfer of its liabilities as a “tool in [its] arsenal”, and it would be evaluating multiple de-risking options over the next couple of years.



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