Capital Markets

UPS Adds Debt in Balance-Sheet Revamp

A three-part sale nets $4 billion; the company plans to spend $10 billion over the next two years to repurchase shares.
Stephen TaubJanuary 11, 2008

United Parcel Service made a series of announcements in recent days designed to further leverage its balance sheet as well as boost stockholder returns.

On Thursday UPS sold $4 billion in global debt, according to Reuters. The sale included $1.75 billion in 5-year notes, priced to yield 4.596 percent, or 145 basis points over comparable Treasuries; $750 million in 10-year notes, priced to yield 5.526 percent, or 165 points over Treasuries; and $1.5 billion in 30-year bonds, priced to yield 6.238 percent, or 180 points over the benchmark.

The debt offering came one day after the company announced its plan to significantly increase debt in order to increase investments in its business, pursue acquisitions, and repurchase shares. UPS said it aims to achieve a 50 percent to 60 percent ratio of funds from operations to total debt. Previously, there was no stated metric.

The company also announced that it increased fivefold the amount of funds available for stock repurchases, from about $2 billion to $10 billion. It added that it intends to complete the share repurchases over the next two years.

“UPS has had a longstanding commitment to a very strong balance sheet for decades, and that will not change,” says Scott Davis, its chairman and CEO.

The credit-rating agencies, however, were not thrilled with these moves. Standard & Poor’s lowered its corporate credit and senior debt ratings for UPS by three notches, from the long-cherished AAA to AA-, and removed the ratings from CreditWatch. S&P also affirmed the company’s commercial paper rating at A-1+. “Debt leverage (as measured by adjusted debt to capital) will more than double following the implementation of the new financial policy,” said S&P in a statement.

On Wednesday Moody’s affirmed the company’s Aa2 rating. However, last month it cut UPS’s senior unsecured debt two notches from Aaa to Aa2, citing the package-delivery company’s recent agreement to withdraw from the Central States multiemployer pension plan.

At least one equity analyst, however, applauded the UPS moves. On Thursday Edward Wolfe of Bear Stearns upgraded the company’s shares to “Outperform” from “Peer Perform,” asserting that long-term catalysts begin to emerge. In a note to clients, he wrote, “UPS should benefit over the next few years from a change in senior management.”

In October UPS promoted Davis, who had been CFO for five years, to the top slots, succeeding Mike Eskew.