It is an understood risk in a typical carveout transaction that the Pension Benefit Guaranty Corporation (PBGC) could perceive its own interests as threatened in the transaction and consequently choose to interfere with the parties’ bargain. As the federal guarantor of corporate pension plans, the PBGC has a potential economic interest in (among other transactions) any transaction in which (1) debt is layered onto a business, especially secured debt; and/or (2) a smaller asset base is available to support future plan contributions—both of which are present in a typical leveraged buyout (LBO) of a division or subsidiary. This concern has to date been viewed as largely theoretical, as the PBGC typically either does not appear in a transaction at all; or, if it does appear, it extracts relatively modest protections from the parties. Two recent developments suggest that the PBGC intends to become more active in LBO transactions:
- In April, the PBGC initiated proceedings to terminate a pension plan in connection with Compagnie de Saint-Gobain’s sale of its US metal and glass containers business to Ardagh Group. Initiation of a plan termination is typically viewed as an attempt to scuttle a transaction for the reasons summarized below.
- In a recent interview, the PBGC has announced that it intends to become more aggressive in future LBO transactions and to allocate more of its resources in this area.
When the PBGC takes over a pension plan, the PBGC becomes obligated to pay the plan’s participants and thereby depletes its insurance fund. Because of an unusual and limited statutory framework, the PBGC’s principal means of protecting its insurance fund in LBO transactions is the threat of terminating the plan. ERISA provides the PBGC with discretion to terminate a pension plan if, among other things, the loss to the PBGC is expected to increase unreasonably if the plan is not terminated. If a plan were involuntarily terminated in this manner before the transaction, the PBGC has a claim against the plan sponsor and all of its affiliates for the unfunded plan liabilities. For example, if the PBGC is concerned that an LBO transaction with an underfunded plan located at the sold business could result in a significant increase in the risk of loss to the PBGC, the PBGC could threaten to terminate the pension plan before the transaction, thus crystallizing the liability against both the seller and the sold business. This threat could have the effect of scuttling the transaction, as neither the banks nor the seller would be likely to proceed in light of this uncertainty. However, in practice, the PBGC generally seeks not to end a transaction but rather to negotiate with the plan sponsor to obtain protections for the insurance fund as an alternative to terminating the plan. These alternatives could include promises of additional cash contributions to the plan, letters of credit to secure promises to make future contributions to the plan, pledges of security interests in certain assets, parent or affiliate guarantees or ongoing information requests.
Two points of this statutory scheme are worth emphasizing: (1) in fact, the PBGC should never want to terminate a plan in connection with an LBO, or should want to do so only as a matter of last resort, because terminating the plan would require the PBGC to dip into its insurance fund, and this is the very event the PBGC is intending to avoid (it is for this reason that threats of plan terminations have been perceived, in some cases, as overtures to negotiation and, in other cases, as empty bluffs); and (2) the PBGC loses all of its leverage once the deal closes (this is so because, after a deal closes, the PBGC loses the ability to chase the assets of the seller and its affiliates and will typically only have a claim against the new standalone entity that is subordinated to the new secured debt).
In the Saint-Gobain deal, the PBGC has said that it is concerned that Ardagh, a noninvestment grade buyer headquartered in Luxembourg that will finance the $1.7 billion transaction with $1.45 billion of debt, will end up in bankruptcy and leave the PBGC with a $500 million unfunded liability. The PBGC has said that it tried to negotiate with Saint- Gobain to obtain guarantees and additional contributions to the plan, but Saint-Gobain has to date only reported that it views its plan as very well funded. (This discrepancy likely arises because the PBGC values liabilities on a “wind-up” rather than “going-concern” basis, which has the effect of magnifying underfunding.) In a highly unusual step, the PBGC on April 18, 2013 acted on its threat and filed a complaint in a Pennsylvania court to involuntarily terminate the plan. Separately, Sanford Rich, the new head of the PBGC’s negotiations and restructuring group, has given a press interview in which he has announced that the PBGC intends to take a more active role in LBO transactions—that he believes the agency has been “insufficiently aggressive” and that PE funds should “assume that [the agency] will be there” in future LBO carveouts. Collectively, these actions and statements amount to a significant increase in PBGC-related risk in these transactions, and one which buyers and sellers should not discount or ignore. While the outcome of the PBGC’s renewed focus on LBO transactions remains to be seen, the agency may not be bluffing anymore. Further proceedings in the Saint-Gobain matter will be a crucial test and should be closely followed.