Telecom Sector Credit Ratings May be Affected by Pension Contributions

June 29, 2009 ( - In a recently released special report, Fitch Ratings says the U.S. telecom sector may experience credit quality pressures as a result of expected pension contributions in 2009 and 2010.

According to the report, weak market performance in 2008 and the resulting possibility of pension contributions rising in the coming years is a particular concern given the disparity in the legacy cost structure element between incumbent wireline operators and their competitors, a press release said. While the cost of pension benefits comprise only one element of the overall competitive position of the wireline incumbents, the benefit costs are an important consideration given their insurgent competitors do not have these cost burdens from highly unionized workforces.

Currently, for the regional Bell operating companies (RBOCs) and the rural local exchange carriers (RLECs), Fitch said their defined benefit plans do not appear to be hampering the companies’ competitive positions to a severe degree. Despite the market declines of 2008, pension plans do not appear to be severely underfunded and increases in contributions in 2009 and 2010 appear to be manageable relative to expected cash flows.

Fitch does not expect to take rating actions based on the possibility that companies may need to make these increased contributions; however, for companies that are on the edge of a rating category, the need to make ongoing pension contributions could be one of the leading factors to a negative rating change.

Cash outlays could put operators at a competitive disadvantage versus competitors not burdened by these cash requirements, according to a press release. Constrained cash flows coupled with higher than expected future contributions could pressure overall credit quality.

The full special report, Telecom Pension Plans in a Tumultuous Market , reviews and analyzes the following issues:

  • A breakdown of telecom operators with pension plans and those without;
  • A comparison of each company’s change in plan assets and funded status during 2008;
  • Expected contributions in 2009 and beyond as disclosed by the companies;
  • The ability of companies to manage estimated pension outflows as measured by the ratio of outflows as a percentage of funds from operations; and
  • A summary of recent changes to plans by companies in response to the competitive environment.

The report is available on Fitch’s Web site, .