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S&P Ratings News January 10, 2008, 11:56AM EST

UPS Drops Off S&P's Triple-A List

S&P Ratings downgrades the package delivery giant to AA–, leaving only five U.S. nonfinancial companies still in the exclusive AAA club

From Standard & Poor's RatingsDirect

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The exclusive triple-A club just lost another member. On Jan. 9, 2008, Standard & Poor's Ratings Services lowered its corporate credit and senior debt ratings on United Parcel Service (UPS) to AA– from AAA and removed the ratings from CreditWatch, where they were placed with negative implications on Oct. 1, 2007. The 'A-1+' commercial paper rating, which was not on CreditWatch, has been affirmed. The outlook is stable.

The move reduces the number of AAA-rated U.S. nonfinancial corporations—those in the industrial, telecommunications, and utility categories—to just five.

  U.S. Corporate AAA Issuers* (as of Jan. 10, 2008)

Issuer Sector Subsector Outlook

Johnson & Johnson (JNJ) Industrial Health Care Stable

Automatic Data Processing (ADP) Industrial High Tech Stable

General Electric (GE) Industrial Diversified Stable

Exxon Mobil (XOM) Industrial Integrated Oil & Gas Stable

Pfizer (PFE) Industrial Health Care Negative

The number of AAA-rated U.S. nonfinancials has fallen sharply from a peak of 32 in the early 1980s (BusinessWeek.com, 3/1l/05). Changes in financial policy, which basically translate into a change in corporate risk orientation, have figured importantly in the fall from AAA for some pretty significant companies, including Coca-Cola (KO), Procter & Gamble (PG), DuPont (DD), and Federated Department Stores. For others, such as Ford (F), General Motors (GM), Eastman Kodak (EK), Bristol-Myers Squibb (BMY), Sears (SHLD), and AT&T (T), changes in the business environment were the key ingredient in their credit quality decline.

The rating actions on UPS follow the company's announcement it will pursue a less conservative financial policy that will result in more debt leverage in the capital structure. UPS has indicated it plans to operate the company and manage its capital structure in such a way as to maintain funds from operations (FFO) to debt (as defined by UPS) within the 50%-60% range. Under Standard & Poor's definition, this would likely result in somewhat weaker FFO to debt, but generally averaging about 50%.

UPS will incur more debt as a result of an increase in share repurchase activity, which is coming on the heels of the company's $6.1 billion funding of its withdrawal from the Central States multiemployer pension plan.

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