Moody’s Investors Service says that new pension legislation in the U.S. will likely change corporate behaviour in several ways.

The new rules mean that companies that have under-funded pension plans will likely borrow to cover the increased contributions starting in 2008. Normally, this additional borrowing will not affect credit ratings, it says.

However, “In certain circumstances, substitution of pension debt with contractual debt could reduce the cushion under existing covenants or require some firms to seek waivers to existing credit agreements,” says Moody’s managing director Gregory Jonas, an author of a new report on the legislation. “Also, we expect that lower rated companies will likely see increased pressure on coverage ratios given the likelihood of borrowing at higher interest cost to fund increased pension contributions.”

In general, Moody’s says the law’s 2008 effective date and numerous transition provisions should allow companies to prepare themselves adequately for any additional required funding.

“The reform act will likely lead to a more direct relationship between the funding status of a company’s pension plan and its required pension contributions,” says Moody’s vice president Rohit Mathur, a co-author of the report.

Moody’s says companies with well-funded plans will not see a meaningful change in their required contributions. They could benefit from the ability under the law to put additional funds into plans in a tax-efficient way, it adds.

The rating agency also says the law may change corporate behavior in several ways. “First, those companies with poorly funded plans poised to be deemed “at risk” under the legislation, and in turn required to make significant additional contributions, may well redirect sufficient cash flows into their plans to avoid the designation in 2008,” it predicts.

Second, Moody’s expects the law to add to the trend to freeze plans or exit defined pension plans entirely. “Funding reform will expose the inherent volatility of the defined pension plans,” says Mathur.

“Third, some companies may shift their funding away from equities towards fixed income instruments in order to better match the cash flow from their assets to benefit payments, thus immunizing their pension liabilities,” it concludes.