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
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
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
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
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