BCG Pension Insider

March 2020 - Volume 101, Edition 1

Oil Market Crash Exposes Liquidity Drought in Corporate Debt Trading

MarketWatch | Reported by Sunny Oh | March 10, 2020

Bid-ask spreads even for highly-rated corporate issuers jumped to as high as 120 basis points Monday.

The sharpest one day fall in oil markets since the 1991 Gulf War on Monday revealed familiar cracks in the corporate credit market.

The 34% fall in benchmark crude oil prices in four days to the lowest level since February 2016 helped to produce sharp swings in prices for corporate bonds and expose old concerns about the lack of trading in a market that has seen the primary providers of liquidity pull back in the aftermath of the 2008 financial crisis.

Analysts have complained that post-crisis regulations have made banks and other broker-dealers less willing to warehouse risky corporate debt, making it more difficult to buy and sell such securities.

The oil plunge on Monday hit the energy sector particularly hard and it represents around 10% share of the overall U.S. sub-investment grade bond market, or junk bond market. The widening spread between corporate debt and U.S. Treasury yields helped to increase the cost of trading, with the bid-ask spread, or the difference between prices quoted between buyers and sellers, for corporate debt widening sharply on Monday.

“Bid-ask spreads are blowing out for the worst companies, especially in the energy space,” said Michael DePalma, managing director at MacKay Shields, who oversees the HYLD exchange-traded fund HYLD, -5.441%. “Credit’s just getting creamed.”

See: Bond investors say some energy companies ‘will not survive’ oil rout slamming markets

Falling prices for sub-investment grade corporate debt, or “junk” pushed their yields higher, increasing the premium investors paid to own such risky debt over equivalent Treasurys.

This premium, or credit spread, surged to 6.68 percentage points at the end of Monday from a recent low of 3.49 percentage point on Jan.6, according to an index tracked by ICE Data Services. For investment-grade, this spread shot up to 2.05 percentage points from around 1.20 percentage points at the start of the year.

Monday also saw the biggest selloff in U.S. stocks since 2008. The S&P 500 SPX, -8.833% fell 7.6%, and the Dow Jones Industrial Average DJIA, -9.467% retreated 7.8%.

Yet unlike in equities, prices and yields in the corporate bond market do not necessarily reflect actual transactions at those values, given the hefty transaction costs associated with buying or selling a security.

Indeed, the tumble in corporate bond values dried up liquidity among dealers selling debt even for the highly rated bonds.

The bid-ask spread for bonds issued by businesses rated between A to BBB and sporting a maturity between one to five years, usually a highly liquid corner of the corporate debt universe, blew up to an average of 120 basis points on Monday, according to data from Bond Wave.

In other words, if an investor tried to sell $1 million worth of bonds, they would have to give up 1.2% of the overall bond’s value and receive $988,000 in cash.

During less frenzied trading periods, this spread was more frequently seen at a more muted 20 to 30 basis points. Even in the peak of the December 2018 selloff in U.S. equities, the bid-offer spread rose to less than 60 basis points.

Click here to continue reading

Officials Issue New Items for DB Plan Sponsors

PlanSponsor |By PlanSponsor Staff | December 10, 2019

The PBGC has issued a final rule regarding pension plans undergoing distress or involuntary termination, and the OSFI has released a form for contribution schedule reporting.

The Pension Benefit Guaranty Corporation (PBGC) has published a final rule amending its regulation on Allocation of Assets in Single-Employer Plans by substituting a new table for determining expected retirement ages for participants in pension plans undergoing distress or involuntary termination with valuation dates falling in 2020.

The table is needed to compute the value of early retirement benefits and, thus, the total value of benefits under a plan. The rule is effective January 1, 2020.

The Office of the Superintendent of Financial Institutions (OSFI) issued a Schedule of Expected Pension Contributions Form. Section 9.1 of the Pension Benefits Standards Act, 1985(PBSA) requires a pension plan administrator and the fund trustee or custodian to notify the OSFI when expected contributions to a pension plan are not remitted on time. To enable fund trustees or custodians to fulfill their obligation to report late remittances, the PBSA requires a plan administrator to notify them of the amount and expected remittance date of future contributions. For this, the Schedule of Expected Pension Contributions Form may be used.

The OSFI says the use of the form is not compulsory and administrators may choose to use another format to notify the trustee or custodian of expected contributions. Fund trustees or custodians should notify the OSFI if a schedule is not provided.

Click here for full article


Standard Pension Closeout / Terminal Funding Case Rates
(No lump sums, disability or unusual provisions)

Retirees - 1.48%
Term Vesteds - 1.53%
Actives - 1.65%

Annuity Purchase Rates as of March 16, 2020