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Rating Action:

Moody's affirms Aa3 rating of United Parcel Service; outlook to negative

28 Apr 2015

Approximately $10 billion of rated unsecured debt outstanding

New York, April 28, 2015 -- Moody's Investors Service affirmed its debt ratings assigned to United Parcel Service, Inc. ("UPS"): Aa3 Senior Unsecured and P-1 Short-term and changed the rating outlook to negative. Moody's also affirmed the P-1 Short-Term rating assigned to UPS Global Treasury Plc.

RATINGS RATIONALE

In changing the rating outlook to negative, Moody's believes that it could be some time before UPS sustains its credit metrics at levels that fully support the Aa3 rating. "This is from the combination of expected lower free cash flow generation because of a lengthy period of increased capital investment, a more aggressive financial policy of funding some of share repurchases with debt and the potential to continue to underperform its annual financial plans," said Moody's Senior Credit Officer, Jonathan Root. UPS has for a number of years not met its FFO to Debt ratio of at least 50% that remains the governor of its financial policy and this trend could continue. UPS plans increased capital investment in technology to improve its operating efficiency to allow it to readily serve increasing package volumes and grow its profit margin. The about 40% increase in capital spending in UPS' current five year plan could indicate that the company has been under-investing in its operating assets in recent years, supporting free cash flow generation that has been used to fund increasing returns to shareholders. "The ongoing shift in demand, to more lower-weight, lower-yield business-to-consumer packages makes it more important for the company's initiatives to be successful, to preserve the operating margin advantage it holds over industry peers," continued Root. Rate increases, an important lever to support top line growth, will also be needed to offset declining package weights. The negative outlook also considers the execution risk in the strategy to rely on technology investment to address the changing profile of package demand.

Moody's anticipates that starting in 2015, financial policy will become more aggressive as it estimates that funded debt will increase as UPS repurchases shares in excess of free cash flow. This is despite the recurring inability of UPS to meet its FFO to Debt policy target. Moody's believes that the capital program and debt-funded share repurchases will continue to challenge the company to achieve the target.

UPS's strong business profile and leading position in the global package delivery, freight and logistics industries support the Aa3 rating. Revenue diversification from its global footprint, a difficult to replicate integrated business model, industry-leading EBIT margin, and a significant variable cost component mitigate near-term ratings pressure. However, credit metrics are and will likely remain weak for the Aa rating category, even when excluding the $14 billion of debt Moody's adds to the balance sheet for the company's exposure to multi-employer pension plans. The choice to use debt to fund returns to shareholders rather than to modulate such returns during a period of increased capital investment foregoes the opportunity to strengthen credit metrics and the positioning of the rating within the Aa3 rating category.

The rating could be lowered if Moody's does not expect UPS' FFO to Debt to approach its policy target of 50%. Continued debt-funding of share repurchases could also lead to a downgrade of the ratings as could a reduction in unrestricted cash and short-term investments, net of issued commercial paper, to below $2.5 billion, particularly if credit metrics do not strengthen. The inability of UPS to realize the operating efficiencies from the hub modernization and other technology investments to sustain its operating profit margin could also pressure the ratings, and reoccurrences of recent peak season challenges in upcoming years could be an indication that investment has not been sufficient. Expectations of sustaining Retained Cash Flow to Debt below 20%, EBIT to Interest below 13.0 times or Debt to EBITDA above 2.0 times could also lead to a lower rating. Upward potential in the rating is limited until more than $5.0 billion of funded debt is reduced with no weakening of operating performance or liquidity.

The principal methodology used in these ratings was Global Postal and Express Delivery Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

United Parcel Service Inc. headquartered in Atlanta, Georgia, is the largest package delivery company in the world, and a leader in less-than-truckload freight services in the US and global supply chain management. The company reported $58.2 billion of revenue in 2014.

Affirmations:

..Issuer: Dallas-Fort Worth Intl. Airp. Fac. Imp. Corp.

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

..Issuer: Delaware County Industrial Dev. Auth., PA

....Backed Revenue Bonds, Affirmed Aa3

..Issuer: Louisville & Jefferson Cnty Rgnl Arpt Auth KY

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

..Issuer: Louisville Regional Airport Authority, KY

....Backed Senior Unsecured Revenue Bonds, Affirmed Aa3

..Issuer: United Parcel Service, Inc.

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Programs, Affirmed (P)Aa3

....Senior Unsecured Short-term Medium-Term Note Program, Affirmed (P)P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed Aa3

....Senior Unsecured Shelves, Affirmed (P)Aa3

..Issuer: UPS Global Treasury Plc

....Backed Senior Unsecured Commercial Paper (Foreign Currency), Affirmed P-1

Outlook Actions:

..Issuer: United Parcel Service, Inc./UPS Global Treasury Plc

....Outlook, Changed To Negative From Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert P Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Aa3 rating of United Parcel Service; outlook to negative
No Related Data.
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