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The following is a press release from Fitch Ratings: Fitch Ratings-London-12 July 2010: Fitch Ratings says today that it see no downside to the debt holders of BT Group Plc (BT, rated 'BBB'/'F2'/Stable) from the High court case starting this week. The court hearing will determine the scope of the Crown guarantee on BT's pension liabilities. Confirmation of the scope of the this government guarantee could result in BT making limited savings on payments it currently makes to the Pension Protection Fund in the short-term with the potential for further changes over the medium-term. "One of the key issues for BT's credit profile is the level of cash contributions it makes to fund its pension deficit," says Damien Chew, Director in Fitch's Technology, Media and Telecoms team in London. "Legal clarity on the Crown guarantee may allow the BT pension trustees to reduce the pension deficit payments BT has to make when the next pension actuarial valuation is undertaken in December 2011." A court decision is not expected until Q410. The Crown guarantee dates to BT's privatisation on 6 August 1984 in relation to its pension liabilities. It would only be triggered in the unlikely event that BT is declared insolvent and its pension scheme is wound up. Fitch believes that this government guarantee covers from around two-thirds to three-quarters of BT's pension fund liabilities, which had a present value on an accounting basis of GBP43bn at end March 2010. BT Group's most recent agreement with its pension trustees, announced on 11 February 2010, extends the agreed funding plan of three payments of GBP525m per year till 2011 with further deficit payments of GBP533m in real terms until 2025, based on a actuarial funding deficit, measured at 31 December 2008, of GBP9bn. The existence of the Crown guarantee was not taken into account in determining the valuation. The real cash drain the current actuarial valuation reflects is a concern, as it is a significant proportion of BT's free cash flow target, before pension payments and other specific items, of GBP1.8bn for FY10/11. Fitch continues to believe that BT's pension deficit remains a significant cause for concern and is a negative factor for group deleveraging, even though pension deficit payments can be absorbed by the group's operational cashflow in the short- to medium-term. However, the GBP9bn funding deficit at 31 December 2008 should be viewed against the backdrop of a wider economic context which suggests that this number represents peak valuations which have, or will, moderate over time. BT reported on 13 May 2010 that the funding deficit, as of December 2009, has dropped to GBP7.5bn. In Fitch's opinion, there is a possibility that this reduction at the next actuarial valuation in December 2011, combined with clarity over the Crown guarantee, may lead to a reduction in the pension deficit payments announced in February 2010. Fitch also recognises that certain factors could cause the agency's perception of BT's pension risk to increase in the short term. Firstly, the pensions' regulator is still reviewing the current settlement with BT's trustees. The rating could be negatively affected if this resulted in higher short-term contributions, although Fitch considers this unlikely given that BT's three payments of GBP525m for 2009-2011 have already been approved. A more long-term concern is longevity assumptions. BT revised these assumptions upwards by two years in its most recent actuarial valuation. However, improvements in longevity are impossible to predict with certainty. Fitch views this as the most important concern for the resolution of the pension deficit in the long term. Further rationale for BT Group's rating is provided in the 15 February 2010 credit update report, which is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 27 November 2009, and 'Corporate Pension Criteria - EMEA and Asia-Pacific", dated 15 April 2010, are also available at www.fitchratings.com. Contacts: Damien Chew, London, Tel: +44 (0) 20 7682 7603, Michael Dunning +44 (0) 20 7417 6343, Alex Griffiths (Pensions) +44 20 7417 4207. Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: [email protected]. Additional information is available at www.fitchratings.com. Related Research: Corporate Rating Methodologyhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018Corporate Pensions Criteria - EMEA and Asia-Pacifichttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=513665 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. (END) Dow Jones Newswires July 12, 2010 04:30 ET (08:30 GMT)