FedEx (FDX) Ratings Affirmed by S&P Amid TNT Express Bid

Standard & Poor's Ratings Services said today that it has affirmed its ratings on FedEx (NYSE: FDX) including the 'BBB' corporate credit rating. The outlook is stable.

"Standard & Poor's ratings on FedEx reflect the company's improved credit metrics, bolstered by its ongoing efforts to increase profitability, which should cushion the effect of the incremental debt associated with the proposed acquisition," said Standard & Poor's credit analyst Betsy Snyder. We expect FedEx's credit metrics to recover within two years of the acquisition as the company benefits from its increased presence in Europe, cost synergies related to the acquisition, and a shift in its discretionary cash flow from share repurchases to debt reduction. FedEx has indicated that it expects to complete the acquisition in the first half of calendar-year 2016. We expect the company's funds from operations (FFO)-to-debt ratio to decline to around 30% at the time of the acquisition from around 35% for the 12 months ended Feb. 28, 2015, and to improve thereafter. FedEx currently has a well-established global footprint, offering its customers a full range of transportation and logistics services. Although FedEx lacks a significant ground network in Europe, it does have a sizeable European express business that is primarily focused on intercontinental services. We expect the proposed acquisition to increase FedEx's presence in Europe, especially in ground operations.

The stable outlook reflects our expectation that until the proposed acquisition closes, FedEx's credit metrics will continue improving because of the company's successful efforts to increase profitability. If the proposed acquisition is completed, we expect FedEx's credit metrics to weaken somewhat due to the incremental debt associated with the acquisition, but they should improve within two years as the company benefits from its increased presence in Europe, cost synergies related to the acquisition, debt reduction, and reduced share repurchases.

We could lower our ratings on FedEx if unanticipated operating challenges from the proposed acquisition or larger-than-expected share repurchases reduce the company's FFO-to-debt ratio to less than 25% and we believe that it will remain at that level.

Although unlikely, we could raise our rating on the company if its operating performance exceeds our expectations and it manages its share-repurchase program in such a way that its FFO-to-debt ratio increases to 40% and we believe it will stay at that level or above.

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