NEW YORK - (Business Wire) Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding debt ratings of FedEx Corporation (NYSE: FDX) and its Federal Express Corporation subsidiary, as follows:
FedEx Corporation
--Long-term IDR 'BBB';
--Senior unsecured 'BBB';
--Unsecured credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper program 'F2'.
Federal Express Corporation
--Long-term IDR 'BBB';
--Senior unsecured 'BBB'.
The ratings apply to approximately $1.8 billion in senior unsecured debt obligations and a $1 billion revolving credit facility. The Rating Outlook is Stable.
FedEx's ratings reflect the transportation company's strong market position in the global transportation services industry, robust liquidity position and expectations for ongoing free cash flow strength despite facing the twin challenges of slowing global economic growth and still-high fuel prices. Although FedEx's core express delivery volumes have declined to pre-1998 levels in the U.S., demand continues to grow in the company's ground package delivery business and FedEx Freight continues to perform relatively well given the very difficult market conditions in the less-than-truckload (LTL) sector.
To cope with the weakening economic environment, FedEx has significantly lowered its capital spending forecast for fiscal 2009 and reduced discretionary spending in other areas of the business, both of which will help to preserve free cash flow as margins tighten. FedEx's credit profile may weaken somewhat in the near term, but it is expected to remain consistent overall with the current ratings. Risks include a further significant weakening in the global economy and/or another steep rise in jet fuel and diesel prices, both of which could put additional pressure on free cash flow generation. Longer-term, changes to the employment status of FedEx Ground's independent contractors could result in meaningful increases to FedEx's operating costs.
With the cooling of the global economy, FedEx has seen demand for its express delivery services wane. In the company's fiscal first quarter ended Aug. 31, U.S. express package volume was down 5.2% versus the year-earlier period and in-line with levels seen more than 10 years ago. Adding further pressure to the FedEx Express unit, International Priority volumes, which had been growing as U.S. volumes declined, were flat in the quarter, reflecting, in part, the slowing of economies outside the U.S. In addition to a general weakening of demand, a portion of the decline in FedEx Express' volumes also can be attributed to customers shifting their business into lower-cost networks as high fuel surcharges have raised the cost of overnight express package deliveries. This shift, along with market share gains and growth in FedEx Ground's Home Delivery business, has helped to bolster package volumes in the FedEx Ground network, which grew 4% (excluding FedEx SmartPost volumes) in the company's fiscal first quarter. FedEx Freight also continues to see volume growth, with market share gains driving a 5.1% increase in pounds shipped per day during the quarter, despite the difficult LTL market conditions.
As the market environment has become more challenging over the past two years, FedEx's consolidated margins have declined, while growth initiatives have driven capital spending higher. As a result, free cash flow declined to $435 million in the twelve months ended Aug. 31, down from $571 million in fiscal 2007 and $1.1 billion in fiscal 2006.
Despite the decline in free cash flow, FedEx's liquidity position remains very strong, with $1.6 billion in cash and equivalents at the end of the fiscal first quarter, augmented by access to a $1 billion unsecured revolving credit facility. In fiscal 2009, FedEx has reduced its planned capital spending by nearly $350 million from the fiscal 2008 level, which will help to support free cash flow even if operating cash flow declines. Debt maturities over the next 12 months are relatively heavy, however, with $500 million in unsecured notes coming due in April 2009 and another $500 million due the following August. Fitch currently expects liquidity to be sufficient to repay the first maturity with cash, but the company could seek to either refinance the second set of notes upon maturity or temporarily fund the maturity with revolver borrowings.
FedEx's credit metrics have been relatively stable over the past several years. At the end of the fiscal first quarter, lease adjusted debt to EBITDAR stood at 2.8 times (x), up slightly from 2.7x at both fiscal year-end 2008 and 2007, but down from 2.9x at the end of fiscal 2006. At the same time, EBITDAR to gross interest expense and rent coverage declined slightly to 3.0x at Aug. 31, down from 3.1x at the end of both fiscal 2008 and fiscal 2007 but up from 2.9x at the end of fiscal 2006. With the potential for tighter margins over the next year, credit metrics could weaken slightly from current levels, but Fitch expects metrics to remain generally consistent with FedEx's 'BBB' ratings.
The greatest near-term risk to FedEx's ratings would be a further significant decline in global market conditions and/or another spike in fuel prices. FedEx recently has demonstrated some flexibility in reducing both operating expenses and capital spending, and Fitch expects the company could make further cuts in both to help preserve free cash flow in an even more challenging operating environment. However, a much deeper decline in the global economy than currently projected or another dramatic rise in jet fuel and diesel prices could crimp free cash flow and drive a material decline in FedEx's credit profile. Such a decline may result in either Fitch revising FedEx's Rating Outlook to Negative or downgrading the ratings.
Longer term risks also include the potential for adverse rulings in legal challenges to FedEx Ground's independent contractor model that could force the unit to reclassify contractors as employees. A change in the contractors' status could depress the unit's margins, as well as expose it to potential back taxes and penalties imposed by the Internal Revenue Service (IRS) and various state tax authorities. The IRS has already indicated that it likely will assess $319 million in back taxes and penalties related to the alleged misclassification of employees on FedEx's 2002 tax return, and it is looking into similar issues related to the company's 2004 through 2006 returns. If FedEx is required to recognize contractors as employees, the effect on FedEx's credit profile could be material and could ultimately contribute to a revision in the either the ratings themselves or on the Rating Outlook.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Fitch Ratings, Chicago
Stephen Brown, +1-312-368-3139
William Warlick, +1-312-368-3141
Media Relations, New York
Cindy Stoller, +1-212-908-0526
