A sea-change has taken place in the last few years for the Pension Benefit Guarantee Corporation (PBGC). The PBGC was created by the Employee Retirement Income Security Act (ERISA) of 1974 to cover the pensions of those under private, defined benefit pension plans. The original mission was to charge premiums to sponsors of the pension plans in order to generate the revenue needed to cover claims.

This works, like everything else, in principle, under ideal conditions. In this case, the recent hit to the economy in the early 2000s, the lower return of the market since the boom's end and the decline, until recently, in interest rates has taken its toll on the PBGC. The legacy airlines' travails have crash-landed on the PBGC's books with the effect of causing a dramatic mismatch between assets and liabilities, while also blowing up the size of the PBGC's "Reasonably Possible Exposure" to an all time record high. (Reasonably Possible Exposure refers to the under funded plans associated with companies with speculative-grade bond ratings, aka distressed bonds, if things are really bad enough in our personal viewpoint.) More to come in future discussions, and we fear more to come for the PBGC, but also more, perhaps optimistically, for some distressed airline bond investors.