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Rating Action:

Moody's affirms FedEx's Baa1 senior unsecured rating, stable outlook

Global Credit Research - 06 Jan 2014

Assigns Baa1 rating to $2.0 billion of new senior unsecured notes

New York, January 06, 2014 -- Moody's Investors Service affirmed all of its debt ratings of FedEx Corporation and Federal Express Corporation (together "FedEx" or the company), including the Baa1 Senior Unsecured rating, the Prime-2 Short-term rating for commercial paper and all ratings assigned to the company's equipment trust or enhanced equipment trust certificates. The rating outlook is stable. Moody's also assigned a Baa1 rating to the $2.0 billion of new senior unsecured notes FedEx announced this morning, the proceeds of which will fund an accelerated share repurchase of $2.0 billion ("ASR").

RATINGS RATIONALE

Moody's affirmed the company's ratings notwithstanding the increase in debt that will result from the accelerated share repurchase. It believes that FedEx's strong franchises in the markets for Express services and Ground package delivery will allow it to continue to generate good earnings and relatively modest free cash flow in upcoming years because of ongoing investment to modernize its aircraft fleet and ground equipment. The $1.7 billion, three year cost improvement plan scheduled to conclude in the company's 2016 fiscal year will support growth in operating profits and cash flow as well as help mitigate pressure on earnings and financial leverage that would accompany a decline in demand during periods of weak or declining economic growth. The strong performance in equity markets in 2013 will improve the funded status of the company's pension plans, significantly reducing Moody's adjustment to debt for pension underfunding, offsetting the increase in adjusted debt from the new unsecured notes.

The Baa1 senior unsecured rating reflects the company's strong brand and market position, supportive credit metrics and very good liquidity. The Baa1 rating incorporates the potential for additional increases in funded debt since Moody's believes that the company will repurchase, by December 2014, the about 16 million shares that will remain under the current repurchase authorization following the completion of the ASR. Moody's also anticipates that Debt to EBITDA will remain below 2.8 times and EBIT to Interest above 3.5 times, even if FedEx was to incur an additional $1.0 billion of debt to fund share repurchases in this time frame. Prior to the October 2013 share repurchase authorization for about 10% of the company's outstanding shares, the company limited share repurchases to levels that mostly offset dilution from exercises of employee stock options. The size and pace of execution of the October 2013 authorization represents a stark change in the company's financial policies in comparison to its historical practice. Whether FedEx will revert to its historical practice after it completes purchases under the current authorization remains a question. Reversion to the prior practice would strengthen the company's position within the Baa1 rating category. Continuation of share repurchases at the current high level could pressure the rating.

The stable outlook reflects the financial and operating benefits of the cost improvement plan and anticipates that FedEx will continue to focus on yields to help mitigate the effects of the trade down to lower priority services, supporting earnings and free cash flow generation. FedEx's cost flexibility should also help mitigate potential earnings pressure if demand weakens because of slowing economic growth. The ratings and stable outlook contemplate that FedEx will continue to operate under its current business model, including the Ground Segment's independent contractor model. The unionization of a broad swath of the company's workforce, or the Ground Segment service providers no longer being classified as independent contractors will only become apparent over time. Moody's treat these as event risks, for which it would assess the implications on ratings if and when they occur.

A negative rating action could follow if FedEx was to continue to repurchase shares at levels in excess of free cash flow generation following the completion of the existing share repurchase authorization. A large acquisition that required debt-funding and was expected to weaken credit metrics or consume the majority of the company's cash balance could also pressure the rating. Debt to EBITDA that approaches 3.0 times or a sustained reduction in unrestricted cash to below $1.5 billion could pressure the ratings as could negative free cash flow or EBIT to Interest that is sustained below 3.0 times. A rating upgrade is not likely in the near term, but a positive rating action could occur if Debt to EBITDA is sustained at about 2.0 times, EBIT to Interest approaches 5.0 times and unrestricted cash is sustained above $2.5 billion. Free cash flow generation approaching 10% of debt could also lead to a ratings upgrade.

The principal methodology used in this rating was the Global Postal and Express Delivery Methodology published in December 2011 and Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

FedEx Corporation, based in Memphis, Tennessee, is the largest express transportation company in the world. The company is a leading provider of small-package ground delivery service to businesses in the U.S. and Canada and residences in the U.S., as well as one the largest U.S. less-than-truckload freight operators under the FedEx Freight segment and provides business services through FedEx Services.

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

Michael J Mulvaney
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 FedEx's Baa1 senior unsecured rating, stable outlook
No Related Data.

 

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