19 November 2017

IRS Inaction Affects Pension Plans in 2016

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U.S. companies with defined-benefit pension plans will save at least $18 billion in 2016 because the Internal Revenue Service has yet to adopt updated assumptions on how long Americans are living, says Moody’s Investors Service.

The IRS sets the minimum funding requirements for companies’ pension plans, and many observers had expected the IRS to boost the amounts that companies must contribute to their plans for 2016 because of the new assumptions on mortality. Those assumptions, issued last year by the Society of Actuaries, show the average 65-year-old American living about two years longer than under the previous assumptions 15 years ago. That translates into companies making more pension payments, and thus potentially higher contributions to help companies cover those payments.

But the IRS last month said it is still evaluating the new assumptions. Any new regulations on mortality rates won’t take effect until 2017, it said. That has the effect of deferring any increase in required pension contributions until then, saving companies billions for 2016, Moody’s said in a research comment Tuesday. It also could speed up lump-sum buyouts to those enrolled in pension plans, since the delay in adopting the new assumptions means buyouts will be cheaper in 2016 than in the future, Moody’s said.

Many companies already have adopted the new assumptions and are showing weaker pension funding as a result, as their pension obligations rise. As The Wall Street Journal reported in February, General Motors Co. said the mortality changes caused the funding of its U.S. pension plans to fall short by an added $2.2 billion. Consulting firm Towers Watson estimated at that time that the funding status of pension plans at 400 large U.S. companies could weaken by a total of $72 billion under the new assumptions. But the IRS’s inaction really amounts just to kicking the can down the road, Moody’s said. It is “just delaying the inevitable adjustment,” said Wesley Smyth, a Moody’s analyst.

For High-Grade Bond Sales, a Sudden Dry Spell 

In the middle of a record-setting year, fundraising in the high-quality U.S. bond market has come to a sudden standstill. Investment-grade companies had been on track for a record year as a surge in deal-making activity led many firms into the bond market to fund those deals. Analysts say tighter Federal Reserve policy on the horizon also compelled businesses to lock in cheaper rates.

But the last investment-grade deal priced in the U.S. bond market was Hershey’s $600 million offering on Aug. 18. Dealogic said that is the longest stretch of no activity among U.S. companies excluding financial firms since its records began in 1995. That stretch excludes inactive days between Christmas and New Year’s.

Before this dry spell, high-grade U.S. debt sales outside of financial institutions were at a year-to-date record of $568 billion, Dealogic says. UBS last month estimated 2015 supply would be a record $1.34 trillion. Why the sudden stop? Recent market volatility may be to blame, which often discourages the pricing of securities. Some traders also point to more expectations the Fed may keep its benchmark rate near zero for a little longer, which gives companies more time to enjoy cheap borrowing costs.

Of course, investment-grade offerings may come back into full swing, analysts say, especially if financial markets stabilize.  Invesco last week said it expects a record-breaking supply to hit the market between Labor Day and the Fed’s Sept. 17 policy announcement. With about $190 billion in the pipeline needed to finance M&A deals, the firm says about $80 billion in investment-grade offerings could hit the market then.

All that impending supply could keep a lid on U.S. investment-grade bond prices. Investors were handed a total loss of 0.84% this year through August, according to Barclays.

LendingClub, On Deck Get Some Love 

The financial-technology firms LendingClub Corp. and On Deck Capital Inc. were first beloved by investors and then quickly battered. Wednesday, Bob Ramsey of FBR Capital Markets, weighed in on the two alternative-lending companies for the first time, giving them both a “buy” rating.

Key to Mr. Ramsey’s thesis is their respective huge potential markets. Lending Club is a so-called marketplace lender with much of its business catering to consumers refinancing loans. On Deck originates loans for small businesses. Mr. Ramsey says the total potential market could be $400 billion just for prime credit-card accounts, and Lending Club has serviced just $6.5 billion so far.

He estimates the market for business loans under $250,000 in the U. S.—just one part of On Deck’s market—could be at least $200 billion, with $120 billion more of unmet demand. On Deck’s share is less than 1% of the total potential market. And both, he notes, have a first-mover advantage. Mr. Ramsey expects their costs to tumble as loan volumes grow, thus improving profitability.

Click here to access the full article on The Wall Street Journal.

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