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Corporates ask for cash after UK pension fund gilt blow-up-source

Corporates ask for cash after UK pension fund gilt blow-up-source
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LONDON, Sept 30 (Reuters) – British pension funds with big losses on gilt market derivatives have sought emergency funding from the companies they manage money in as they race to dump assets to raise cash, industry sources said on Friday.

Many pension funds were caught out this week when bond yields rose, prompting the Bank of England to step in. Funds had to stump up cash to meet collateral demand.

Some funds exited derivatives positions because they couldn’t cash in on time, but are trying to pare back those hedges so they don’t face more volatile moves, the people said. Demand for cash from liability-driven investment (LDI) funds that manage derivatives has created a crisis that threatens many of Britain’s biggest pension funds. Some fear it could spread contagion widely.

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Some pension funds sought help from their sponsors, the parent companies whose employee pensions they manage, including trying to open credit lines with banks, according to three pension consultants and one pension fund manager.

The extent of liquidity pressure on pension funds remains unclear after the Bank of England said on Wednesday it would buy 65 billion pounds ($72.21 billion) of gilts and suspend plans to sell bonds it already holds. “Schemes are looking to do whatever they can to reset their hedges,” said Simeon Willis, chief investment officer at XPS Pension Group, including seeking standby facilities with their sponsors. A pension fund manager, who spoke on condition of anonymity, said his scheme had asked his parents to open a credit line on Wednesday when it looked like it was running out of cash but was refused. The BoE then made its announcement, sending bond yields lower and easing panic.

Sarco’s pension scheme, the outsourcing giant, has requested a line of credit from its parent, British media reported on Friday. Serco declined to comment.

“We understand the importance of companies hedging that we can support pension schemes, and we’ve got pension funds with an eye on their short-term liquidity advantage,” said Calum McKenzie, investment partner at Aon.

LDI strategies help pension funds match their liabilities, future payments to pension members and their assets.

According to the Investment Association, the market has grown over the past decade and has around £1.6 trillion of assets in Britain. Read more

These strategies, sold by the likes of BlackRock, Insight Investments and Legal & General, are complex, use derivatives and leverage and are designed to hedge against volatile price swings in gilts.

But the markets moved so fast this week that the strategies couldn’t keep up.

Pension schemes were forced to sell assets to raise cash but everyone else is doing the same, pushing bond prices lower and prompting more calls for cash in a “doom loop” that the BoE on Wednesday decided threatened financial stability.

Banks expect pension funds to try to stay as liquid as possible and sell other assets.

“Fund surpluses will likely be used to reduce leverage rather than hunt for yield. Assets will be kept as liquid as possible,” Estien Schunrad, who works in the LDI team at RBC Capital Markets, said in an email to the pension fund on Friday. Reuters has seen.

“As for the immediate market impact, I expect the sell-off of less liquid assets to continue more slowly as market pressure eases. Any forced selling of gilt + linker in recent times may be possible when conditions allow.”

Pension funds own less liquid investments, ranging from government and corporate bonds to stocks and private equity.

RBC did not respond to requests for comment. Insight and L&G declined to comment. BlackRock said it was cutting leverage in its LDI fund. Read more

($1 = 0.9002 pounds)

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Reporting by Carolyn Cohn and Tommy Reggio Wilkes; Editing by David Gregorio

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