TEXT-S&P may cut United Parcel Service

Tue Aug 28, 2012 4:47pm EDT

Overview
     -- United Parcel Service (UPS) recently announced that the regulatory 
authorities in Europe are moving to a phase two review of its proposed 
acquisition of TNT Express N.V. 
     -- UPS also announced that it has reached an agreement with the New 
England Teamsters and Trucking Industry Pension Fund (NETTI) to restructure 
the withdrawal liability related to that plan. 
     -- We are evaluating the company's exposure to multiemployer pension 
plans as part of our review. 
     -- We are keeping our ratings on UPS on CreditWatch with negative 
implications, where we had placed them after UPS first announced its plan to 
acquire TNT. 
     -- Based on UPS' publicly disclosed plans to finance its planned 
acquisition of TNT, we could lower the rating one notch if the merger 
proceeds. Even if that does not occur, we could lower ratings if we believe 
that potential liability under MEPPs will prevent the company from achieving 
credit measures that we judge as acceptable for the current ratings.

Rating Action
On Aug. 28, 2012, Standard & Poor's Ratings Services said that its ratings on 
United Parcel Service Inc. (UPS) remain on CreditWatch with negative 
implications, where we had placed them on Feb. 17, 2012. 

Rationale
UPS announced on March 19, 2012, that it had reached an agreement to acquire 
TNT Express N.V. (BBB+/Watch Pos/A-2) for EUR9.50 per share in cash, or an 
estimated $6.77 billion. On May 3, 2012, UPS announced that it plans to 
finance the TNT Express transaction with $5 billion of cash and $1.8 billion 
of debt. It also announced that it plans to repurchase $1.5 billion of shares 
in both 2012 and 2013. We originally placed our UPS ratings on CreditWatch 
with negative implications on Feb. 17, 2012, after UPS acknowledged that it 
had made a proposal to acquire TNT Express for EUR9 per share in cash. TNT 
Express rejected the initial proposal but subsequently agreed to the sweetened 
deal. Initially, UPS had hoped to close the transaction in the third quarter 
of 2012. However, the European regulatory authorities have moved to a phase 
two review, which means that the transaction, if approved, would likely not 
close until late this year.

We believe the transaction will enhance UPS' business profile by bolstering 
its position in Europe and providing it with growth opportunities in other 
international markets where it currently has limited presence. However, the 
transaction will initially cause a deterioration in credit metrics. 

UPS' financial profile has also been weakened by increased potential 
liabilities related to multiemployer pension plans. We view the withdrawal 
liability related to these plans to be a debt equivalent. The withdrawal 
liability has increased due to record low interest rates and low asset 
returns. In 2007, UPS withdrew from the troubled Central States pension plan 
by paying $6.1 billion (pretax). Last week, the company announced an agreement 
with NETTI to restructure its plan, which will enable it to pay a $2.1 billion 
withdrawal liability over 50 years, so that the present value of its payments 
is only $896 million. Although this is a favorable development from a credit 
perspective, we note that UPS multiemployer pension plan (MEPP) exposure 
remains significant and will be an important factor in our analysis when we 
resolve the CreditWatch. 

UPS is the world's largest package delivery company, with a significant 
presence in all major global markets. TNT Express is a smaller package 
delivery company that generates the majority of its revenues in Europe. TNT 
Express was spun off from TNT N.V. (now PostNL N.V.) in June 2011. The 
combined entity would generate annual revenues of more than $60 billion. The 
deal is subject to various approvals, including regulatory approval and 
shareholder approval. PostNL N.V. holds approximately 29.8% of the shares of 
TNT Express and has committed to supporting the transaction. 

CreditWatch
Standard & Poor's will monitor the regulatory and shareholder approval process 
related to the TNT transaction and will resolve the CreditWatch following the 
completion of the regulatory review in Europe. As part of our review, we will 
assess UPS' current operating outlook and the effect of the company's exposure 
to MEPPs. Based on UPS' publicly disclosed plans to finance its planned 
acquisition of TNT, we could lower the rating one notch if the merger 
proceeds.  In addition, even if that does not occur, we could lower the 
company's rating if we believe that its potential liability under MEPPs, which 
has increased in recent years because of low interest rates and subpar asset 
returns, will prevent the company from achieving credit measures that we judge 
as acceptable for the current rating.

Related Criteria And Research
     -- United Parcel Service Inc. Ratings Remain On CreditWatch Negative 
After Announcement Of Financing For TNT Acquisition, May 4, 2012
     -- What's Driving Standard & Poor's Ratings On United Parcel Service, 
March 22, 2012
     -- Research Update: United Parcel Service 'AA-' Ratings Remain On 
CreditWatch Negative On The Company's Agreement To Acquire TNT Express, March 
19, 2012
     -- Research Update: UPS 'AA-/A-1+' Ratings Placed On Watch Negative After 
Announcing Proposed Acquisition Of TNT Express N.V., Feb. 17, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Will Mounting Funding Pressures On Multiemployer Pension Plans Hurt 
Issuers' Credit Quality?, June 9, 2009
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Standard & Poor's Approach To Analyzing Employers' Participation In 
U.S. Multiemployer Pension Plans, May 30, 2006

Ratings List

Ratings Remaining On CreditWatch
United Parcel Service Inc.
 Corporate credit rating             AA-/Watch Neg/A-1+
 Senior unsecured                    AA-/Watch Neg
 Commercial paper                    A-1+/Watch Neg

United Parcel Service of America Inc.
 Corporate credit rating             AA-/Watch Neg/A-1+
 Senior unsecured                    AA-/Watch Neg