NEW YORK--(BUSINESS WIRE)--Pension obligation bonds (POBs), which some issuers have pursued in response to weak funded ratios, are likely to have a neutral to negative impact on the issuer's credit quality, according to a Fitch Ratings report. Issuing POBs may affect the issuer's overall liability burden and financial flexibility, and always adds investment risk. Likewise, the issuer's underlying pension situation before and after POB issuance are important considerations when assessing the credit impact of POBs.
'The rating on a POB issuer incorporates these varying--and often offsetting--contextual factors to assess the extent to which issuing POBs results in a net change to the issuer's risk profile' said Douglas Offerman, Senior Director at Fitch.
When POB proceeds add to a system's assets, they effectively replace one long-term liability with another and, thus, have no net impact on the total liability burden assessed by Fitch. However, if proceeds are used to offset actuarial contributions made from budget resources, or not made at all, Fitch views the POB to be a deficit financing. Fitch also assesses the repayment profile of the POBs compared to the pension contributions being replaced, and the issuer's track record of making full actuarial contributions.
In Fitch's view, unsustainable pension commitments pose a much greater risk to credit quality than issuing POBs given the nature of the benefit obligation as an annuity with a high fixed rate of return. Whether issuers fund their pension liabilities through cash contributions or POB proceeds is less relevant to credit quality than whether those issuers are willing and able to correct underlying pension sustainability challenges through reform.
For more information, a comment titled 'Pension Obligation Bonds: Weighing Benefits and Costs' is available on the Fitch Ratings web site at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Pension Obligation Bonds (Weighing Benefits and Costs)