Issuer Comment: Moody’s: BT’s planned pension capital injection is
credit neutral
Global Credit Research – 23 Mar 2012
Moody’s Investors Service has today said that BT’s planned capital injection to reduce the size of its
pension deficit does not have an immediate impact on the group’s Baa2 ratings (stable outlook). This
reflects Moody’s expectation that BT’s credit metrics will remain broadly unchanged and within the
guidance for the current rating. The rating agency already includes the pension deficit as adjusted debt
when calculating BT’s key credit ratios.
On 23 March 2012, BT announced that it had reached an agreement with the trustee of its pension
scheme on the approach to the 2011 triennial funding valuation and recovery plan, including a capital
injection of GBP2.0 billion before the end of March 2012 to fund part of its pension plan deficit. The
lump-sum payment will receive tax relief at 26%, which will lead to lower cash tax payments in the 2013
financial year.
In addition to the GBP2.0 billion lump-sum payment, BT has agreed with the pension trustee to make
annual deficit payments of GBP325 million per year over the next nine years. There is also a pre-agreed
payment structure starting in 2015 to provide a degree of certainty in the event that the pension deficit
increases beyond a certain level in the next triennial valuations of 2014 and 2017.
As of December 2011, BT reported a pension deficit of GBP5.4 billion under IAS19 accounting.
Moody’s uses IAS19 valuation amounts and not the triennial actuarial funding valuation for the purposes
of adjusting debt for the deficit amount.
After this transaction, BT’s credit metrics will remain in line with the requirements for the rating category,
with adjusted retained cash flow (RCF)/net debt solidly positioned in the 20%-25% range and adjusted
total debt/EBITDA comfortably below 3.5x.
Moody’s positively considers the substantial effort that BT is making in reducing its pension liability.
However, there is a risk that the liability may increase again if pension asset values drop in the midst of
the current financial market turmoil or if its projected liabilities increase because of changes in the
discount rate or in inflation expectations. Given the volatility in the pension deficit, the Baa2 rating with a
stable outlook incorporates the potential for moderate deviations from the aforementioned ratio ranges
on a temporary basis.
While the impact on BT’s credit metrics of the planned capital injection will be relatively neutral, its
liquidity position will be weakened. At December 2011, the group had cash and current investment
balances of GBP1.6 billion and available long-term committed credit facilities of GBP1.5 billion. The
group plans to use its large cash resources to fund most of the planned capital injection into the pension
plan. However, Moody’s anticipates that BT’s cash levels will grow again in line with expected solid cash
flow generation, while the group will need to use the availability under its facilities to fund the balance of
the capital injection unless it raises additional debt.
Domiciled in London, UK, BT is one of the world’s leading providers of communications solutions and
services, and operates in 170 countries. BT consists principally of four lines of business: BT Global
Services, Openreach, BT Retail and BT Wholesale.
Contacts Phone
Ivan Palacios/Madrid 34917026644
Carlos Winzer/Madrid 34917688238
Paloma San Valentin/London 442077721385
