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Friday, 7 February, 2003, 18:28 GMT
Pension threat to blue chip credit ratings
Companies are under pressure to close the funding gap
Ten of Europe's biggest companies have been threatened with credit rating downgrades because of shortfalls in their pension funds.

At risk?
BAE Systems
Rolls Royce
Deutsche Post
Portugal Telecom
Three years of falling stock markets have opened up a gap between the companies' assets and their potential liabilities, according to credit rating agency Standard and Poor's.

UK manufacturing giants BAE Systems, Rolls Royce and GKN are among the high profile companies named by the agency as being at risk.

Last week investment bank Morgan Stanley published research claiming FTSE 100 companies collectively faced a 85bn pensions deficit as a result of falling markets.


Downgrading a company's credit rating can push up the cost of borrowing.

But Standard and Poor's assessment has been angrily denied by several of the companies involved.

UK supermarket giant Sainsbury said the credit rating review was linked to its proposed bid to take-over rival Safeway.

A spokesman said: "Our credit rating has not changed.

"It is normal for any company considering a bid to be reviewed."

He said the next valuation of the company's pension fund would take place as scheduled on 30 March and the result would be made known towards the end of the year.

No cashflow problems

The ten companies have been placed on S&P's "creditwatch", which means the agency is concerned their credit rating could be downgraded.

Although the agency could also decide to maintain the current rating.

S&P said it would make a decision on the ten companies within the next two months.

It added that of the groups affected, only Sainsbury's, BAE Systems, Rolls-Royce and German steel group ThyssenKrupp could be subject to a two notch downgrade.

But it stressed none of the companies faced cashflow problems as a result of their pensions liabilities.

Healthcare costs

The agency analysed figures from more than 500 European firms, comparing the value of their pension scheme assets at the end of 2002 to their future pension costs.

S&P credit analyst Emmanuel Dubois-Pelerin said S&P viewed unfunded retirement pensions for workers in the same way as debts.

"Moreover, Standard & Poor's believes that the risks arising from such liabilities have increased as a result of intense public debate on stricter funding rules, a continuing rise in healthcare costs, ongoing deterioration in equity values, and a weakened global economic environment," he added.


The S&P assessment will make particularly gloomy reading for Pilkington.

A downgrade would take its stock to the brink of junk status.

A Rolls-Royce spokesman said S&P had not reached a decision on its credit rating.

He said the agency had yet to see its results for 2002, which were due to be published next month.

"In the unlikely event of us receiving a double notch downgrade the maximum impact on our interest payments would be less than 1m and it would have no impact on our borrowing ability."

BAE Systems and GKN declined to comment on the move.

No-one from the company was available for comment.

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