S&P assigns A+ issue-level rating to UPS's new senior notes, reflecting its strong competitive position, substantial earnings, cash flow

Cindy Allen

WASHINGTON , September 25, 2012 (press release) – Standard & Poor's Ratings Services said today that it has assigned its 'A+' issue-level rating to United Parcel Service Inc.'s (UPS) new senior notes. UPS will use proceeds from the debt issuance to refinance its $1.75 billion senior notes, which mature on Jan. 15, 2013, and for general corporate purposes.

We recently lowered our long-term corporate credit rating on UPS to 'A+' from 'AA-' because of a weakening in credit metrics as a result of increased exposure to multiemployer pension plans (MEPPs) and the company's plans to continue making significant shareholder rewards while pursuing a large acquisition. UPS reached an agreement earlier this year to acquire TNT Express N.V. (BBB+/Watch Pos/A-2) for an estimated $6.77 billion. Our ratings are based on an expectation that UPS will complete the TNT transaction over the next few months and that funds from operation (FFO) to debt will remain 40%-50% over the next two years while the company integrates TNT. We also assume that this ratio will gradually improve closer to 50% over that period.

We calculated FFO to debt by adjusting for cash in excess of $1 billion--which we view as "excess cash" and net against debt, operating leases, reported post-retirement obligations, and self insurance reserves. It excludes our adjustment for MEPP exposure, which is based on confidential information that UPS supplied to Standard & Poor's.

The ratings on Atlanta, Ga.-based UPS also reflect its very strong position in ground parcel delivery and substantial earnings and cash flow. Its participation in a competitive industry with some exposure to cyclical demand pressures somewhat offsets these strengths. UPS benefits from its position as the leading provider of ground package delivery in the U.S. and from its significant presence in domestic air express package delivery, international package delivery, and logistics services. We characterize the compay's business risk as "excellent," its financial risk as "intermediate," and its liquidity as "strong."

If economic pressures cause cash flow and earnings to decline materially below our expectations, the company encounters unexpected problems integrating the TNT transaction, or pension obligations increase materially, such that FFO to debt falls to the mid-30% area (before adjusting for MEPPs) and we no longer believe it will improve to 50% over the next two years, we could lower the ratings. If the company restores credit metrics to the levels we expect, with FFO to debt of 40%-50% (before adjusting for MEPPs), and if the company encounters no TNT-related integration issues, we could revise the outlook to stable.

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