TEXT-S&P may cut United Parcel Service
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
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