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Rating Action:

MOODY'S CONFIRMS Baa2 SENIOR UNSECURED DEBT RATINGS OF FEDEX; RAISES OUTLOOK TO STABLE; REVIEWS RATINGS OF CERTAIN EETC'S FOR POSSIBLE DOWNGRADE

03 Dec 2004
MOODY'S CONFIRMS Baa2 SENIOR UNSECURED DEBT RATINGS OF FEDEX; RAISES OUTLOOK TO STABLE; REVIEWS RATINGS OF CERTAIN EETC'S FOR POSSIBLE DOWNGRADE

Approximately $8.2 Billion of Debt Securities Affected.

New York, December 03, 2004 -- Moody's Investors Service confirmed the debt ratings of FedEx Corporation and Federal Express Corporation (together "FedEx"), senior unsecured ratings at Baa2 and short term debt rating at Prime-2. The outlook was raised to stable from negative. In a related action, Moody's placed the ratings for certain tranches of FedEx's Enhanced Equipment Trust Certificates (EETC's) under review for possible downgrade. While considering FedEx's strengthened position within its Baa2 rating, the review of certain EETC tranche ratings specifically relates to concerns with regard to aircraft values, particularly for certain older aircraft that provide collateral protection for the EETC's.

In raising the rating outlook to stable, Moody's cited its expectation for improving profits and cash flows at FedEx in light of continued growth in International Priority (IP) package volumes in the FedEx Express segment, strong growth in FedEx Ground shipments, volume and market share gains in the FedEx Freight business, stronger yields and pricing in all segments, and the realization of benefits from cost saving initiatives. The outlook also reflects the success to date of the integration of FedEx Kinko's. Expected cash flow generation should be sufficient to meet relatively large debt maturities over the next twelve months as well as increases in capital spending. Internally generated cash, when combined with its sizeable cash balances, should allow the company to continue to reduce its acquisition debt and improve debt protection metrics over a relatively short period of time.

FedEx's debt ratings reflect the company's sustainable leadership position in the express package market, solid growth of its IP and ground businesses, and increasing volume and market share in its FedEx Freight business. Profitability should continue to improve as the company realizes benefits from the recent business realignment in the FedEx Express business, ongoing integration of FedEx Kinko's, and ongoing cost containment initiatives within the entire organization. Continued economic strength in the US and demand for the company's services to and from Asia support volume growth and increased yields. Increases in fuel costs have largely been passed through to the customer through fuel surcharges. With a high degree of operating leverage, profitability should also continue to benefit from increased package volume, especially in Asia, and increased pricing. As a result, Moody's expects FedEx's operating cash flows to also improve over the near-to-intermediate-term, more than offsetting planned increases in capital spending.

FedEx's ratings also reflect, however, the cyclical and capital-intensive nature of its business, which is reflected in the forecasted increase in FY2005 capital expenditures to over $2.1 billion. Furthermore, the ratings reflect the potential for increased competition in the international package delivery business following the acquisition of Airborne Express by DHL, although the impact is highly dependent on the speed and effectiveness of the integration of DHL and Airborne, and the degree to which aggressive pricing is an element of competitors' business plans.

FedEx's operating profits improved dramatically in the first quarter of FY2005, as FedEx's Express, Ground and Freight segments all reported significant increases in revenue and profits. Excluding FedEx Kinko's, FedEx's Q1 revenue and operating profit grew 14% and 180%, to $6.5 billion and $560 million, respectively, due to increased demand for its broad portfolio of services worldwide, as well as better yields and pricing, and savings from recent cost cutting initiatives.

Retained cash flow for the latest twelve month period ended August 31, 2004 also strengthened significantly, to nearly $2.5 billion from $2.3 billion reported in fiscal 2004, due to stronger profits and the completion of restructuring spending. Thus, the ratio of retained cash flow-to-debt improved to 69.2% for the latest twelve month period, from 63.8% at the end of fiscal 2004. Meanwhile, free cash flow improved $63 million to just over $1.7 billion and the ratio of free cash flow to lease-adjusted debt remained flat at 16%. Moody's noted that the improved cash flow enabled the company to fund higher levels of capital spending while maintaining a solid level of free cash flow.

The company's liquidity position remains strong, and is supported by the combination of solid retained cash flow generation and significant unused capacity under its bank revolving credit agreements. The company's capital structure was boosted by the successful arrangement of longer term financing for a portion of the funding of the Kinko's acquisition, although a $600 million one-year note matures in March 2005. Other debt maturities are limited over the near-term, and the company's pension plans are fully funded.

Going forward, FedEx's cash flow is expected to benefit from a number of factors. Although domestic express volumes continue to be flat-to-down with pricing relatively stable, the international portion of FedEx's business is growing very rapidly, and is increasingly profitable. The company's IP business should continue to benefit from strong volume growth in Asia, Europe and US export, better pricing, and ongoing cost cutting measures. Additionally, although the company will be investing more heavily in aircraft and infrastructure in fiscal 2005 to expand its domestic Ground and rapidly-growing Express IP operations, the improvements in profitability should help boost operating cash flows to levels that will more than offset the increases in capital spending.

Moody's noted that continued improvement in operating margins and free cash flows, such as margins exceeding 10% and the ratio of free cash flow to lease-adjusted debt improving to over 20% on a sustainable basis, would be a positive benefit to the company's debt ratings. However, circumstances that reduce profitability and free cash flow, such as an overly-aggressive capital spending plan and a downturn in the economy or increased competition based on price, could weaken the company's credit profile.

Despite the improved rating outlook for FedEx's fundamental credit ratings, the ratings on the A- and B- tranches of FedEx's EETC's were placed under review for possible downgrade due to ongoing concerns with regard to aircraft values. Ratings for EETC's are a function of the credit quality of the underlying obligor, the benefits of certain structural enhancements in the transactions, and the value of collateral supporting the transactions. For the FedEx transactions being reviewed for downgrade, the values for the aircraft, primarily A300 and MD11 freighters, have continued to decline faster than the amortization of the debt. Thus, despite the improved rating outlook for FedEx, the review of the EETC ratings will focus on the relationship of the value of the aircraft collateral to the outstanding principal of the EETC's and the overall adequacy of collateral protection for the transactions. The ratings on the C-tranches, the most junior tranches in these transaction, were confirmed at Baa2; FedEx's senior unsecured debt rating.

Ratings confirmed with a stable outlook include:

--FedEx Corporation

Senior unsecured debt ratings confirmed at Baa2

Short-term debt rating confirmed at Prime-2

Bank line of credit confirmed at Baa2

--Federal Express Corporation

Senior unsecured debt including the company's MTN program, confirmed at Baa2

Industrial Revenue Bonds supported by loan or lease agreements, confirmed at Baa2

Secured Loan Certificates confirmed at Baa2

Secured Shelf, confirmed at (P)A3/(P)Baa2

All Equipment Trust Certificates confirmed at Baa1

The most junior tranches of Federal Express Corporation's Enhanced Equipment Trust Certificates were confirmed at Baa2, identical to Federal Express Corporation's senior unsecured rating:

Series 1997-1: Class C, confirmed at Baa2

Series 1998-1: Class C, confirmed at Baa2

Series 1999-1: Class C, confirmed at Baa2

--Caliber System, Inc. (assumed by FedEx), confirmed at Baa2

Ratings placed under review for possible downgrade include:

--Enhanced Equipment Trust Certificates of Federal Express Corporation:

Series 1997-1:

Class A, currently at A1

Class B, currently at A3

Series 1998-1:

Class A, currently at A1

Class B, currently at A3

Series 1999-1:

Class A, currently at Aa3

Class B, currently at A3

FedEx Corporation and its primary operating subsidiary, Federal Express Corporation, are headquartered in Memphis, Tennessee.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gregory D. Clifton
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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