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Rating Action:

Moody's downgrades UPS' senior unsecured rating to A2; outlook remains negative

09 Aug 2019

New York, August 09, 2019 -- Moody's Investors Service ("Moody's") downgraded the senior unsecured rating it assigned to United Parcel Service, Inc. (UPS) to A2 from A1. Moody's also affirmed the P-1 short-term ratings assigned to UPS and to UPS Global Treasury Plc. The outlook remains negative.

RATINGS RATIONALE

"The downgrade reflects our view that UPS will not generate sufficient cash to strengthen its balance sheet while it remains in the midst of a capital intensive period of heavy investment and requisite pension funding, and shareholder returns continue," says Moody's Senior Vice President, Jonathan Root.

Annual free cash flow will remain pressured through 2020 because of significantly higher capital expenditures versus years prior to 2018, providing little opportunity for the company to fund anticipated contributions to pension plans from internally-generated funds, let alone repay upcoming debt maturities, particularly if UPS continues to repurchase its shares. "Though share repurchases have been tempered since 2016, prioritization of share repurchases over a number of years, in concert with recurring annual increases in the dividend, framed an aggressive financial policy that caused UPS to issue debt to fund more than $9 billion of contributions to its pension plans, increasing Debt-to-EBITDA since 2015 by more than 0.5x to over 3x," added Root.

"The negative outlook reflects what we believe will remain a challenging operating environment and the compounding effect of prospective material pension funding needs that will render the company reliant upon the debt capital markets, even if share repurchases are further tempered," said Root. Moody's noted that earnings and cash flows are likely to be affected by ongoing growth in e-commerce that will lead to a greater proportion of lower-yielding e-commerce packages, competitive market dynamics that sustain pressure on yields across the company's service categories and from lower volumes because of weaker global economic growth. Trade friction between the United States and various trading partners, and the effects on trade and consumer spending in Europe and the United Kingdom should a hard Brexit occur in October, will also pressure package demand, potentially for an extended period. While lower interest rates could stimulate economic activity, Moody's also anticipates that there will be growing pressure on the funded status of the pension plans because of lower discount rates.

The A2 rating continues to broadly balance UPS' unique market position and extensive operational capabilities as the world's largest package delivery company also with leading positions in the freight and logistics industries, against a financial profile that remains weak for the assigned rating. The company has historically maintained aggressive governance regarding financial policies, whereby all of free cash flow was directed to share repurchases, leaving no cushion for significant discretionary contributions to the company's single-employer pension plans.

The ratings could be downgraded if share repurchases remain a priority ahead of internally funded contributions to pension plans and/or they exceed free cash flows. Sustained metrics such as Retained Cash Flow-to-Debt below 23%, EBIT-to-Interest below 8x and/or Debt-to-EBITDA above 2.8x (all excluding Moody's MEPP adjustment) could lead to a downgrade. The potential for higher ratings is limited until Debt-to-EBITDA (also excluding the MEPP adjustment) falls towards the 2x range and more conservative financial policies are employed -- particularly during capital intensive periods characterized by heavy investment and/or requisite pension contributions. Sustained expansion of operating margins and operating cash flows would indicate the efficacy of the company's capital investment program and transformation strategy and provide complementary upwards rating pressure.

The principal methodology used in these ratings was Surface Transportation and Logistics published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

UPS, based 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. Revenues were nearly $72 billion in 2018.

The following rating actions were taken:

Downgrades:

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

....Senior Unsecured Revenue Bonds, Downgraded to A2 from A1

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

....Senior Unsecured Revenue Bonds, Downgraded to A2 from A1

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

....Senior Unsecured Revenue Bonds, Downgraded to A2 from A1

..Issuer: Louisville Regional Airport Authority, KY

....Senior Unsecured Revenue Bonds, Downgraded to A2 from A1

..Issuer: United Parcel Service, Inc.

....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

Affirmations:

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

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

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

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

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

....Senior Unsecured Revenue Bonds, Affirmed VMIG 1

..Issuer: United Parcel Service, Inc.

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

..Issuer: UPS Global Treasury Plc

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

Outlook Actions:

..Issuer: United Parcel Service, Inc.

....Outlook, remains Negative

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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