UPS Plans Debt Sale for Funding Pension Contributions
United Parcel Service Inc., the world’s largest package-delivery business, plans a benchmark bond sale to pay for pension-fund contributions as companies face increasing retirement obligations in the future.
Proceeds from the debt due in 2021 and 2040 will be used to fund domestic pension plans whose contributions are otherwise payable over five years, Atlanta-based UPS said today in a regulatory filing. It joins Boston Properties Inc., Icahn Enterprises LP and AutoZone Inc. in marketing and selling debt today.
UPS Chief Financial Officer Kurt Kuehn said in an Oct. 21 conference call that the company’s pension expenses may be “volatile” in 2011 as discount rates tumble to “the lowest in recent history.” U.S. corporate pension plans fell this year into their biggest financial hole ever because interest rates plummeted to 1960s levels, according to David Bianco, chief U.S. equity strategist at Bank of America Merrill Lynch.
“One should fully expect a continuation of stepped-up contributions throughout the balance of this year,” said Kenneth Hackel, president of Alpine, New Jersey-based research and consulting firm CT Capital LLC. “The ramifications are much bigger than investors realize.”
UPS’s U.S. pensions were underfunded by $2.41 billion on Dec. 31, 2009, and by $3.49 billion a year earlier, according to its most recent annual report.
Funding Reversal
The numbers compare with overfunding of $2.49 billion in December 2007, according to the company’s 2008 annual report. UPS has pension funding commitments of about $1 billion a year through 2012. The amount declines to $509 million in 2013, it said in the 2009 report.
The gap between pension-fund assets and projected payouts widened to $380 billion this year for companies in the Standard & Poor’s 500 Index, Bianco estimated in an Oct. 29 report. The shortfall worsened as interest rates fell, he wrote.
The 2021 notes UPS is now planning to offer may yield 65 basis points to 70 basis points more than similar-maturity U.S. Treasuries, and its 30-year bonds may pay a spread of 85 basis points to 90 basis points, according to a person familiar with the transaction. The notes may be issued as soon as today, said the person, who declined to be identified because terms aren’t set. Benchmark sales are typically at least $500 million.
Norman Black, a spokesman for UPS, said he couldn’t discuss details of how the company plans to use the proceeds.
Bond Yields
Investment-grade corporate bond yields fell to 3.53 percent on Nov. 4, the lowest on record, Bank of America Merrill Lynch index data show. The S&P 500 Index has returned about 11.4 percent this year, including reinvested dividends.
Many investors are assuming that because the S&P 500 is up this year that companies “are bailed out from making additional stepped-up contributions,” Hackel said. “The decline in bond yields has completely overridden the advance in stock markets this year.”
“A side effect of companies reducing the risk of their pension funds is their returns are declining as well,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “In order to compensate for declining returns, companies need to provide increasing funding for their pensions.”
Boston Properties
Boston Properties, the U.S. office real estate investment trust led by Mortimer Zuckerman, sold $850 million of notes; billionaire Carl Icahn’s Icahn Enterprises may sell $500 million of bonds in a reopening and AutoZone, the biggest U.S. auto- parts retailer, sold $500 million of debt, Bloomberg data show.
Companies sold $15.8 billion of debt on Nov. 4, which was the most since Sept. 8, the busiest day of issuance this year, Bloomberg data show.
UPS last issued debt in March 2009, when the company sold $2 billion of 5- and 10-year notes, according to data compiled by Bloomberg.
Pension plans are 77 percent funded at S&P 500 companies this year, down from 82 percent at the end of last year, Bianco estimated. The percentage is the lowest since at least 1994, according to the report.
UPS’s 5.125 percent notes due in 2019 traded on Nov. 1 at 117.497 cents on the dollar to yield 2.78 percent, or 14.3 basis points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Seventeen companies are offering or have sold at least $11.2 billion of debt today, as daily volume exceeded $10 billion for the second time this month, according to data compiled by Bloomberg. Corporate bond sales this year may reach $1 trillion today if all the debt being marketed is priced, Bloomberg data show.
To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net.
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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