Difficult valuation exercise

Context

A UK oil company, part of a privately owned multinational parent, had a hybrid DB/DC scheme with assets of c.£150m. The deficit had increased and the sponsor’s covenant was weak as whilst it had oil and gas assets in the UK, there was considerable risk around future cashflows due to volatility in the oil and gas prices, the expected life of the fields they owned, and future de-commissioning costs which would outweigh revenue over time.

The challenge

There was no Parent Company Guarantee (PCG) and there was no visibility of the overseas parent’s assets. The Sponsor considered it was in a strong position due to its revenue-generating capacity and was unwilling to provide any form of contingent asset to support the scheme. Due to the cash pooling arrangements in place the, Trustee was not confident in being able to access the cash sitting on the balance sheet in times of stress.

Our approach

The existing trustees could see the problem but were struggling to see a solution. Our approach was to design a funding plan to increase contributions but fixed on a solvency basis tied to the life of the fields. This new funding plan incorporated an extended recovery period and payment of substantial sums to cover s75 debt.

It was critical to finding a solution where the covenant was considered in the context of the period over which the Company would be cash flow positive rather than purely the Company balance sheet.

The outcomes

The de-risking strategy for the scheme was revised to align to the new funding plan so that within 10 years, the scheme should have all assets in matching assets ready to buy-out. Over the 18-month timescale of negotiation, there had been a substantial amount of transfers from the DB section of the scheme, c.20% of liabilities between the valuation date and settlement date, which the Trustee was able to allow for when settling on the level of contributions required.