Companies in Lehman Brothers Holdings Inc.'s corporate- and high-yield bond benchmarks may see shareholders' equity cut by $537 billion under a plan to put unfunded retiree benefits on corporate balance sheets, Lehman said in a research report.
The Financial Accounting Standards Board, which sets standards for U.S. financial accounting and reporting, issued a draft in March outlining its proposal to move pension and other post-retirement benefits from a company's footnotes to its balance sheet. That change would cut shareholders' equity to $3.6 trillion from $4.1 trillion for companies in the two closely tracked Lehman indexes, Lehman said in a report dated April 28.
Implementation of the FASB proposal ``may be eye-opening for some investors, causing some volatility in both debt and equity markets,'' Lehman said.
There are 312 investment-grade companies and 233 high-yield companies in the two Lehman indexes. High-yield, or junk debt, comprises securities rated below BBB- by Standard & Poor's and Fitch Ratings, and below Baa3 by Moody's Investors Service.
The proposal won't require companies to pay additional cash into their pensions, Lehman said. Yet it may force companies including Detroit-based automaker General Motors Corp., Chicago, Illinois-based aircraft-maker Boeing Co. (BA:US) and United States Steel Corp. (X:US), based in Pittsburgh, to cut dividends, Lehman said.
Those companies would see shareholders' equity wiped out under the proposal from Norwalk, Connecticut-based FASB, according to Lehman. They are incorporated in Delaware, where companies can be restricted from paying dividends if they have negative book equity, according to Lehman.
Credit rating companies already factor post-retirement benefits into their credit analysis, which means ratings changes aren't likely, Lehman said.
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