The large US aerospace and defense companies have fallen further behind in their funding of burgeoning pension liabilities, says Moody’s Investors Service in a new report.
In 2011 the funding gap for the eight largest contractors rose by about $15 billion to $51 billion, and the average level of funding dropped five percentage points from the end of 2010, to 77%.
The defense contractors are able to bill the US government for pension costs, which helps to mitigate the risk such liabilities pose for credit quality, says Moody’s. But the billing must be done on future contracts, and US fiscal pressures could lead to payment delays or more stringent rules being imposed on plan sponsors.
The $51 billion figure for combined pension benefit liabilities (net of plan assets) is for the plans sponsored by Boeing, Lockheed Martin, Northrop Grumman, United Technologies, Honeywell, Raytheon, General Dynamics and Textron — eight of the largest Aerospace & Defense companies with some of the biggest defined benefit pension programs.
Moody’s expects the rising pension liabilities only to pressure ratings of the defense companies at their margins.
“While key credit metrics, especially leverage, look decidedly worse for some companies, we do not expect rating changes solely as a result of the growing pension burden,” says Russell Solomon, a Moody’s Senior Vice President. “Still, companies with outsized funding gaps could face growing downward rating pressure to the extent that liquidity is strained as funding requirements inevitably grow.”
For details see the Moody’s Special Comment Top Defense Contractors See Pension Deficits Widen