Pensions-What UPS’s $2 billon Bond Sale Represents

November 9th, 2010 by hackel Leave a reply »

UPS sold $2 billion in long-term bonds to fund its pensions yesterday, raising its total debt/equity to over 100%.

Although UPS is a solid and consistent generator of both free and operating cash flows, we saw that during the credit crisis of a short couple of years ago, even UPS’s fixed income securities could be impaired.


Even though the after-tax rate on the $2 billion is low, as $1.5 billion was sold at a 3.125% coupon and $500 million was sold at 4.875%, and UPS has a cash tax rate of  about 29% versus a 31.9% reported rate, it does result in lost financial flexibility for the firm. This may not appear  important during the current period of strong financial markets, but could very well change if economic conditions deteriorate or the need for capital arises. At a minimum, such cost will be higher regardless of the period in the economic and business cycle.

Despite the almost 12% rally in stocks thus far this year, pension underfunding has slightly deteriorated due to the lowering of the discount rate-that rate from which liabilities are brought to present value.

In fact, I estimate the median firm having a defined benefit plan now 22% underfunded.

Below is a list of plans with at least $1billion in reported underfunding. Bear in mind the plans at these firms utilize actuarial methods which are not borne in today’s interest rate climate, therefore their underfunded status is greater than what is being reported to shareholders, as yesterday’s action by UPS illustrates. For example, though UPS raised $2billion, I estimate, their plans are still about $600 million underfunded.

Please also bear in mind actions of the sort undertaken by UPS indicate the following:

  1. Past cash flows-operating and free were overstated
  2. New leverage ratio results in higher cost of capital which changes borrowing costs and any equity that needs to be raised
  3. Prospective cash flows impacted by after-tax interest expense
  4. Implicitly recognizes additional future cash flows impacted due to still underfunded status

I would expect many to most of the firms on this list to step up their pension contributions shortly (prior to the 10-K season). The funds will come from a combination of internally generated cash, borrowing, asset sales, or other creative financing, as with Heinz selling of receivables and swaps.

             
Company Name Ticker Symbol Market Value-Traded -Current Pension-Funded Status
3M CO   MMM 62,221.328   (1,686.000)  
ABBOTT LABORATORIES ABT 78,536.584   (1,040.000)  
AEGON NV   AEG 11,579.446   (2,197.096)  
AES CORP   AES 9,488.491   (1,280.000)  
AK STEEL HOLDING CORP AKS 1,490.351   (1,124.700)  
AKZO NOBEL NV  -ADR AKZOY 14,351.122   (2,675.784)  
ALCOA INC   AA 13,891.611   (3,093.000)  
ALLSTATE CORP ALL 16,780.578   (1,106.000)  
ALTRIA GROUP INC MO 54,596.674   (1,205.000)  
AMERICAN ELECTRIC POWER CO AEP 18,022.037   (1,298.000)  
AMERICAN INTERNATIONAL GROUP AIG 6,045.538   (1,888.000)  
AMR CORP/DE AMR 2,779.605   (4,952.000)  
ANHEUSER-BUSCH INBEV  -ADR BUD 100,493.015   (2,214.000)  
AON CORP   AON 13,556.208   (1,733.000)  
ARCELORMITTAL -ADR MT 55,428.093   (1,957.000)  
AT&T INC   T 173,960.960   (3,977.000)  
AVIVA PLC  -ADR AV 19,316.831   (4,753.000)  
AXA  -ADR   AXAHY 43,780.411   (10,638.644)  
BANK OF IRELAND  -ADR IRE 3,789.081   (2,337.549)  
BARCLAYS PLC/ENGLAND  -ADR BCS 49,410.215   (6,120.826)  
BASF SE  -ADR BASFY 72,915.293   (2,445.039)  
BAXTER INTERNATIONAL INC BAX 30,077.524   (1,143.000)  
BERKSHIRE HATHAWAY BRK.B 205,002.922   (2,210.000)  
BOEING CO   BA 51,974.144   (6,356.000)  
BRISTOL-MYERS SQUIBB CO BMY 45,924.510   (1,283.000)  
BRITISH AMERN TOB PLC  -ADR BTI 79,142.096   (1,419.463)  
BT GROUP PLC  -ADR BT 20,485.304   (8,611.981)  
CANON INC  -ADR CAJ 63,127.000   (1,216.416)  
CATERPILLAR INC CAT 52,442.660   (3,780.000)  
CBS CORP   CBS 12,020.325   (1,414.400)  
CELANESE CORP CE 5,966.601   (1,013.000)  
CHEVRON CORP CVX 171,181.973   (3,840.000)  
CIGNA CORP CI 10,339.344   (1,513.000)  
CITIGROUP INC C 125,455.382   (1,052.000)  
COMPUTER SCIENCES CORP CSC 7,666.759   (1,218.000)  
CONOCOPHILLIPS COP 90,855.986   (2,718.000)  
CONSOLIDATED EDISON INC ED 14,759.220   (2,531.000)  
CONTINENTAL AG  -ADR CTTAY 17,826.734   (1,556.455)  
CONTINENTAL AIRLS INC  -CL B CAL @NC   (1,258.000)  
DAIMLER AG DDAIF 151,026.283   (8,463.046)  
DEERE & CO DE 33,561.473   (1,307.000)  
DELTA AIR LINES INC DAL 11,186.885   (9,408.000)  
DEUTSCHE TELEKOM AG  -ADR DTEGY 63,557.514   (8,907.338)  
DIAGEO PLC  -ADR DEO 47,489.261   (1,801.114)  
DISNEY (WALT) CO DIS 70,823.839   (2,159.000)  
DOW CHEMICAL DOW 38,008.480   (5,325.000)  
DU PONT (E I) DE NEMOURS DD 44,147.553   (5,627.000)  
E.ON AG  -ADR EONGY 64,356.162   (4,116.150)  
EASTMAN KODAK CO EK 1,304.054   (1,123.000)  
EATON CORP ETN 15,647.350   (1,568.000)  
ENTERGY CORP ETR 13,685.100   (1,230.470)  
EXELON CORP EXC 27,230.374   (3,643.000)  
EXXON MOBIL CORP XOM 353,269.375   (11,647.000)  
FEDEX CORP FDX 27,940.209   (1,189.000)  
FORD MOTOR CO F 53,939.860   (11,962.000)  
GENERAL DYNAMICS CORP GD 26,128.552   (2,454.000)  
GENERAL ELECTRIC CO GE 176,512.038   (8,698.000)  
GLAXOSMITHKLINE PLC  -ADR GSK 104,003.886   (2,821.142)  
GOODYEAR TIRE & RUBBER CO GT 2,548.157   (2,715.000)  
HEWLETT-PACKARD CO HPQ 99,939.430   (4,482.000)  
HITACHI LTD  -ADR HIT 21,253.396   (9,896.317)  
HONDA MOTOR CO LTD  -ADR HMC 62,965.237   (5,505.867)  
HONEYWELL INTERNATIONAL INC HON 38,236.277   (4,121.000)  
HSBC HOLDINGS PLC  -ADR HBC 134,661.925   (6,109.000)  
IMPERIAL OIL LTD IMO 32,937.697   (1,245.579)  
INTL BUSINESS MACHINES CORP IBM 182,366.166   (8,088.000)  
INTL PAPER CO IP 11,441.314   (2,760.000)  
ITT CORP   ITT 8,764.686   (1,391.900)  
JOHNSON & JOHNSON JNJ 178,377.863   (2,526.000)  
KIMBERLY-CLARK CORP KMB 25,695.840   (1,247.000)  
KRAFT FOODS INC KFT 63,715.045   (1,703.000)  
LILLY (ELI) & CO LLY 41,236.392   (1,545.400)  
LOCKHEED MARTIN CORP LMT 25,914.810   (10,663.000)  
LOREAL CO  -ADR LRLCY 73,694.828   (1,455.415)  
LYONDELLBASELL INDUSTRIES NV LYB 16,789.013   (1,140.000)  
MACY’S INC M 10,803.573   (1,694.000)  
MARATHON OIL CORP MRO 24,008.610   (1,413.000)  
MERCK & CO MRK 112,647.184   (2,348.600)  
MOTOROLA INC MOT 19,032.441   (2,387.000)  
NAVISTAR INTERNATIONAL CORP NAV 3,889.779   (1,508.000)  
NCR CORP   NCR 2,343.424   (1,048.000)  
NESTLE SA  -ADR 3NSRGY 199,906.245   (2,923.344)  
NIPPON TELEGRPH & TELE  -ADR NTT 71,559.539   (15,500.503)  
NISSAN MOTOR CO LTD  -ADR NSANY 40,428.753   (1,772.741)  
NORSK HYDRO ASA  -ADR NHYDY 10,753.180   (1,388.625)  
NORTHROP GRUMMAN CORP NOC 19,058.123   (2,750.000)  
NTT DOCOMO INC  -ADR DCM 73,085.512   (1,481.938)  
PANASONIC CORP -ADR PC 35,544.738   (4,701.284)  
PARKER-HANNIFIN CORP PH 12,971.403   (1,410.649)  
PEPSICO INC PEP 103,569.356   (1,334.000)  
PETROBRAS BRASILEIRO SA -ADR PBR 228,326.143   (4,788.000)  
PFIZER INC   PFE 139,705.269   (6,507.000)  
PG&E CORP   PCG 18,955.380   (1,436.000)  
PPL CORP   PPL 12,936.976   (1,290.000)  
PROCTER & GAMBLE CO PG 181,947.552   (4,683.000)  
PUBLIC SERVICE ENTRP GRP INC PEG 16,828.330   (1,103.000)  
RAYTHEON CO RTN 17,519.937   (4,602.000)  
REYNOLDS AMERICAN INC RAI 19,371.903   (1,216.000)  
RHODIA  -ADR RHAYY 3,154.943   (2,122.569)  
RICOH CO LTD  -ADR 3RICOY 10,588.775   (1,205.278)  
ROCKWELL COLLINS INC COL 9,526.260   (1,040.000)  
SANOFI-AVENTIS  -ADR SNY 95,198.429   (5,734.233)  
SEARS HOLDINGS CORP SHLD 8,227.224   (1,847.000)  
SIEMENS AG  -ADR SI 108,451.902   (5,873.945)  
SMURFIT-STONE CONTAINER CORP SSCC 2,216.191   (1,129.000)  
SONY CORP  -ADR SNE 33,362.234   (3,115.289)  
SOUTHERN CO SO 31,940.645   (1,131.000)  
STATOIL ASA  -ADR STO 68,460.251   (3,186.238)  
TEXTRON INC TXT 6,100.053   (1,443.000)  
TOKIO MARINE HOLDINGS -ADR TKOMY 23,221.780   (1,639.914)  
TOSHIBA CORP -ADR TOSYY 21,551.031   (7,774.484)  
TOYOTA MOTOR CORP  -ADR TM 125,386.413   (5,864.000)  
UBS AG   UBS 63,867.445   (1,611.315)  
UNISYS CORP UIS 1,022.148   (1,505.100)  
UNITED PARCEL SERVICE INC UPS 50,294.639   (2,506.000)  
UNITED STATES STEEL CORP X 6,797.298   (1,708.000)  
UNITED TECHNOLOGIES CORP UTX 70,400.548   (2,894.000)  
VERIZON COMMUNICATIONS INC VZ 94,753.765   (3,226.000)  
VOLVO AB SWE  -ADR VOLVY 21,377.818   (2,161.270)  
WELLS FARGO & CO WFC 143,709.845   (1,607.000)  
WHIRLPOOL CORP WHR 6,066.396   (1,568.000)  
XEROX CORP XRX 16,549.260   (1,633.000)  
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