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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
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
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:
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
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
Class A, currently at A1
Class B, currently at A3
Class A, currently at A1
Class B, currently at A3
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Gregory D. Clifton
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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