Corporate restructuring surge threatens covenants

A SURGE in corporate restructuring caused by the recession has put employer covenants at risk, Punter Southall Transaction Services has warned.

More corporates are expected to default over 2012 and businesses such as Premier Foods, TUI Travel, JJB, Logica and Punch Tavern have already restructured in the difficult climate, the consultancy said.

However, restructuring companies involves altering the legal status of various businesses within firms and can affect the ability of sponsors to support pension schemes, PSTS said, reported Accountancy Age sister publication Professional Pensions.

PSTS head of covenant advice Lorant Porkolab said: “Restructuring can involve moving key assets out of the sponsoring employer and weaken the covenant support available to the pension scheme. This can also happen even if the legal position remains the same.

“Both employers and trustees should prepare to work together on mitigation to put the scheme back in the same place as it was before the restructuring.

“It is important that everyone is pragmatic and commercial throughout the process. Benefits from properly restructuring a business will ultimately bolster the covenant support available for the pension scheme.”

PSTS warned scheme sponsors and trustees to be particularly vigilant in cases where key contracts, employees or intangible assets such as brands are transferred to different subsidiaries within a corporation.

“The trustee needs to consider the sponsoring employer in isolation and the transaction may reduce the strength of the company on a stand-alone basis,” PSTS said in its latest Insight report.

“When a corporate restructuring is considered, the question employers and trustees should address is whether the underlying support for the pension scheme is going to be materially weakened by the proposed changes.

“The weakening can happen in two areas: the on-going financial support available to the scheme; and the scheme’s likely recovery of the buy-out deficit in the event of the employer’s insolvency,” the report continued.

PSTS added that the Pensions Regulator “expects trustees and employers to undertake an analysis of the strength of the employer covenant comparing the pre- and post- restructuring positions to assess the impact of the proposed changes.”

It advised trustees or sponsors faced with weakening scheme funding must seek mitigation from the firm.

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