DLax85

Similar articles, which provide excellent insight into the "cost of capital" (...or the "implied discount rate") FEDEX may use when calculating the costs of our A Fund

Also, interesting to see the asset allocation they utilize

DLax85

FedEx Selling $1.2B in Bonds; Part Will Go to Funding Pensions


FedEx (FDX) started off the new year by offering $1.2 billion in new bonds.

The two-part offer includes $450 million of 10-year debt and $750 million of 30-year bonds, according to LCD News, a division of S&P Global Market Intelligence.

Based on the launch, the likely yields of the new issues will be 3.35% for the 10-year notes and 4.45% for the 30-year bonds. LCD reports:

Proceeds from today’s offering will be used for working capital and general corporate purposes, which include a voluntary incremental contribution to the company’s tax-qualified U.S. domestic pension plans, according to regulatory filings.

In recent years, FedEx has had to take charges against earnings in recent quarters to shore up its pension.

Standard & Poor’s Ratings Service rated the new unsecured debt triple-B a lower investment-grade rating, the same as FedEx’s corporate rating.

Analyst’s write:
Our corporate credit rating on FedEx reflects the company’s strong competitive position and good cash-generating capability.

However, these positive factors are somewhat offset by the company’s participation in competitive and somewhat cyclical markets and its sizeable post-retirement benefit and operating lease obligations.

FedEx also spends a significant amount of its cash on shareholder rewards, although we expect that its spending on shareholder rewards will moderate going forward due to the debt and integration costs associated with its May 2016 acquisition of TNT Express N.V.

We assess FedEx’s business risk profile as strong, its financial risk profile as satisfactory, and its liquidity as strong

DLax85

FedEx to deliver $1 billion pension fund contribution from bond offering

FedEx Corp., Memphis, Tenn., has offered $1.2 billion in new bonds, $1 billion of which will be used to make pension fund contributions, spokesman Jess Bunn said in an e-mail.

The issuance consists of $450 million in 10-year debt and $750 million in 30-year debt at an annualized 3.3% and 4.4%, respectively, the company said in SEC filings Tuesday.

In an earlier 10-Q filing in December, the company had said it planned to contribute $1 billion in January to its U.S. pension funds using proceeds from a debt offering.

FedEx plans to contribute a total of $2 billion, $443 million of which is required, to its U.S. pension funds in fiscal year 2017, which began June 1.

As of May 31, U.S. pension fund assets totaled $23.01 billion, and projected benefit obligations totaled $27.54 billion, for a funding ratio of 83.6%, according to FedEx's most recent 10-K filing.

Also according to the 10-K filing, FedEx made $726 million in pension contributions in the fiscal year ended May 31.

As of May 31, the plans' asset allocation was 29% corporate fixed-income securities, 22% government fixed-income securities, 15% international equities, 14% domestic large-cap equities, 12% global equities, 4% domestic smidcap equities, 2% mortgage-backed and other fixed-income securities, 1% alternative investments, and 1% cash and cash equivalents and other.

Assets totaled $23.83 billion as of Sept. 30, according to Pensions & Investments' data.

DLax85

So it appears the approximate Pension allocation is:

53% bonds
45% stocks
1% cash
1% alternative (perhaps various hedging derivatives)

DLax85

3.3-4.4% annual yield

Thus, 4% may be a simple number to "play with" when comparing the equivalent values of various A plan vs B plan options

The era of lower yields is a stark reality when it comes to prudent retirement planning

DLax85

...or given the fact the pension fund return is actually "juiced up" a bit with 45% equities (and assuming a 6% return on those assets), one could bump that number up to 4.815%

5% for simplicity

MEMA300

So this is good, right.

Fdxlag2

Yes use your retirement check to buy the bond that funds your retirement. It is like a perpetual motion machine.

DLax85

Bumping this thread --- it gives actual data on the "cost of capital" FEDEX using to fund pensions

Please, please realize the rate-of-return assumptions one makes is extremely important to any analysis of A fund buyout, or A fund vs B fund, etc

Of course for the A fund, mortality rates too

I'm highly suspect of any change from a traditional A fund to a variable A fund

I'd rather we maintain a hybrid retirement --- traditional A plan & B plan

If we can only get small incremental increases to A fund, then continue to increase B fund --- rising to about 12-13%

kc10/c130

Well said. Completely agree!