GKN warns on pension scheme covenant if takeover proceeds

first_imgEngineers working on a generator for Brush, a Melrose-owned companyIn its published material regarding the bid for GKN, Melrose stated it would have net debt equal to roughly two-and-half times earnings. GKN’s equivalent leverage ratio was 0.6 times earnings at the end of June 2017.“This may have implications for the covenant strength of the company, the level of the technical provisions deficit and therefore the level of immediate and/or long-term cash funding requirements,” GKN said.The company also flagged its pension arrangements in Germany and the US. In Germany the firm operates Direktzusage pension plans, with benefits paid directly from the balance sheet rather than from an independent pool of assets. GKN said its liabilities for these schemes amounted to approximately £0.6bn.GKN’s UK pension scheme assets ranked it in the top 500 biggest funds in Europe, according to IPE’s Top 1000 Pension Funds study.GKN’s share price has risen by more than a third since the start of the year. Melrose’s first approach was made public by GKN’s board on 12 January. The technical provisions deficit was £0.4bn (€0.5bn) at the end of 2017, the company said. However, the shortfall ballooned to nearly £2bn when based on the amount of money needed to enable both schemes to be transferred to an insurer through a buyout. UK engineering company GKN has argued its pension schemes could be put at risk if a hostile takeover from Melrose is successful.In a notice to the stock exchange published yesterday, the company said Melrose would have a debt level “materially higher” than that of GKN if the takeover was successful. This could push up the schemes’ combined deficit based on a weaker employer covenant.The trustees issued a public statement on 16 January warning of the potential effect on the two GKN schemes if the ownership changed, and the sponsoring employer has now backed up the concerns.“GKN’s covenant strength is critical to investment strategy and the technical provisions,” the company said in its stock exchange notice. “The covenant was assessed at the ‘high end of good’ during the last triennial valuations. An adverse change in covenant strength would be expected to increase the technical provisions deficit.”last_img