CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Funding gains fuel credit quality for US industrials

Home / Spectrum / Funding gains fuel credit quality for US industrials

Jon Brager,
30 April 2014
Uncategorised

For once, credit investors can thank the spectre of rising interest rates for strong returns, says Jon Brager, senior analyst at Hermes Credit..

Welcome relief: Ford and General Motors (GM), with their chronically under-funded pension schemes, were poster children for perceived US industrial decay at the depths of the financial crisis. But higher US Treasury Bond yields have since elevated the metric used to gauge future liabilities: larger “discount rates” have shrunk pension obligations. For credit investors, this boosts the credit quality of parent companies by driving down balance-sheet gearing and improving free cash flow.

Big picture: In 2013, companies in the S&P500 index saw their defined-benefit pension deficits contract 35% to $432bn. Since unfunded liabilities can be seen as interest-bearing debt, this is the equivalent of $248bn in corporate deleveraging and promotes balance-sheet strength and boosts free cash flow as companies don’t need to contribute to schemes. For example, GM and Ford paid $1.5bn and $5.4bn to their respective pension plans in 2013 but, as a result of a stronger funded status, both companies do not expect to make any further commitments in 2014 or 2015.

High-yield highs: The performance of five-year credit default swaps (CDSs) for automotive, manufacturing, transport and mining businesses show the implications of shrinking pension deficits for credit investors. The four high-yield debt issuers that experienced the greatest falls in pension liabilities, which includes GM, benefited from greater spread compression than the market. This outperformance started, in fact, when the US Federal Reserve triggered a spike in yields and subsequent sell off in June 2013 by foreshadowing tapering.

Credit default swaps on US industrials have performed well since the 2013 high-yield market sell off

 

chart1

Source: Bloomberg

Pole position: Investment-grade issuers with large, under-funded pensions have also outperformed. This includes Ford, which experienced the greatest deficit improvement among all US industrials. Its liabilities fell $10.7bn, helping to cut its net leverage – which includes pension obligations – by more than two-thirds to 0.39x. It seems no coincidence that the Ford five-year CDS has performed strongly since its improved pension status was first announced in its financial-year 2013 results.

Investment-grade issuers have also benefited from shrunken deficits in their corporate pensions

 

chart2

Source: Bloomberg

Not over yet: Credit securities from many other US industrials should continue to benefit as balance-sheet improvements and increased free cash flow tighten spreads. The outperformance of high-yield and investment-grade issuers amid fears of rising interest rates is promising: in a market heavily influenced by policymakers, company-specific fundamentals can still determine valuations and yield rewards.

The views and opinions contained herein are those of Hermes Credit, and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The information herein is believed to be reliable but Hermes Funds Managers does not warrant its completeness or accuracy.

Share this post:

Find posts by author

  • Andrey Kuznetsov
  • Filippo Alloatti
  • Fraser Lundie
  • Jonathan Lee
  • Louise Dudley
  • Mark Sherlock, CFA
  • Michael Russell, CFA
  • Mitch Reznick

Find posts by category

  • Select category
  • uncategorised