The UK Hits creditor's Rights

A shocking ruling in the UK will, no doubt, reprice risk for credit investors.

(Telegraph) -- Members of bankrupt pension schemes have been handed a near-blanket guarantee by a radical court ruling that pushes them right up the creditor hierarchy but has been branded "catastrophic" for banks and companies.

In a fundamental shake-up of the corporate debt structure, pension trustees will be able to demand a lump-sum payment from administrators of a failed business ahead of all lenders bar those backed by property assets. Even the administrators will be lower in the pecking order.

 Before the ruling, pension claims ranked beneath the riskiest unsecured loans, potentially robbing workers of their retirement income.

In a packed courtroom at the High Court on Friday, Mr Justice Briggs ruled in favour of The Pensions Regulator in its bid to recover funds from Lehman Brothers and Canadian telecoms firm Nortel for the 43,000 members of the insolvent companies' pension schemes.

The administrators of Nortel and Lehman, which went bust with UK pension deficits of £2.1bn and £148m respectively, were contesting the regulator's decision to issue a "Financial Support Direction" (FSD) requiring them to strike an agreement with the pension trustees before disbursing funds to creditors.

Under the current rules, if no agreement is struck the regulator imposes a "Contribution Notice" (CN) demanding the administrator make a payment to the trustees. In a ground-breaking judgment, Mr Justice Briggs ruled that the CN would qualify as an "administration expense" – meaning it must be paid above all but "fixed asset" creditors, even before the administrators take their fees.

 The implications of this on credit investors is potentially huge.  If pension schemes essentially become priority claims (administrative claims) the recovery rate for secured and unsecured creditors will obviously fall.  Given this, the debt of companies with large unfunded pensions should trade wider (in spread terms) as recovery rates are diminished.  This is akin to the Sons of Gwalia debacle in Australia (which was finally reversed - info here:  SoG Reversal or a summary here: Bracewell on SoG) which impacted credit spreads in Australia.


Keep your eye on this one, it could be a big deal (if it sticks, it is a big deal).  This is why pension obligations must be considered when evaluating a company's creditworthiness.