Annual report pursuant to Section 13 and 15(d)

DEBT AND FINANCING ARRANGEMENTS

v3.20.4
DEBT AND FINANCING ARRANGEMENTS
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
DEBT AND FINANCING ARRANGEMENTS DEBT AND FINANCING ARRANGEMENTS The carrying value of our outstanding debt obligations, as of December 31, 2020 and 2019 consists of the following (in millions):
Principal Carrying Value
Amount Maturity 2020 2019
Commercial paper $ 15  2021 $ 15  $ 3,234 
Fixed-rate senior notes:
3.125% senior notes
1,500  2021 1,507  1,524 
2.050% senior notes
700  2021 700  699 
2.450% senior notes
1,000  2022 1,028  1,003 
2.350% senior notes
600  2022 599  598 
2.500% senior notes
1,000  2023 997  995 
2.800% senior notes
500  2024 498  497 
2.200% senior notes
400  2024 398  398 
3.900% senior notes
1,000  2025 995  — 
2.400% senior notes
500  2026 498  498 
3.050% senior notes
1,000  2027 993  992 
3.400% senior notes
750  2029 746  745 
2.500% senior notes
400  2029 397  397 
4.450% senior notes
750  2030 743  — 
6.200% senior notes
1,500  2038 1,483  1,483 
5.200% senior notes
500  2040 493  — 
4.875% senior notes
500  2040 490  490 
3.625% senior notes
375  2042 368  368 
3.400% senior notes
500  2046 491  491 
3.750% senior notes
1,150  2047 1,137  1,136 
4.250% senior notes
750  2049 742  742 
3.400% senior notes
700  2049 688  688 
5.300% senior notes
1,250  2050 1,231  — 
Floating-rate senior notes:
     Floating-rate senior notes 350  2021 350  349 
     Floating-rate senior notes 400  2022 399  399 
     Floating-rate senior notes 500  2023 499  499 
Floating-rate senior notes 1,039  2049-2067 1,027  1,028 
8.375% Debentures:
8.375% debentures
—  2020 —  426 
8.375% debentures
276  2030 281  281 
Pound Sterling Notes:
     5.500% notes
90  2031 90  86 
     5.125% notes
618  2050 586  566 
Euro Senior Notes:
0.375% senior notes
860  2023 857  779 
1.625% senior notes
860  2025 856  779 
1.000% senior notes
614  2028 611  556 
1.500% senior notes
614  2032 611  556 
Floating-rate senior notes —  2020 —  559 
Canadian senior notes:
     2.125% senior notes
585  2024 583  571 
Finance lease obligations 342  2021 – 2159 342  498 
Facility notes and bonds 320  2029 – 2045 320  320 
Other debt 2021 – 2025
Total debt $ 24,814  24,654  25,238 
Less: current maturities (2,623) (3,420)
Long-term debt $ 22,031  $ 21,818 
Commercial Paper
We are authorized to borrow up to $10.0 billion under a U.S. commercial paper program and €5.0 billion (in a variety of currencies) under a European commercial paper program. As of December 31, 2020 we had U.S. commercial paper outstanding of $15 million with an average interest rate of 0.17% and we had no outstanding balances under our European commercial paper program. As of December 31, 2020, we have classified the entire commercial paper balance as a current liability on our consolidated balance sheets. The amount of commercial paper outstanding under these programs in 2021 is expected to fluctuate.
Debt Repayments
On July 15, 2020 our Euro floating-rate senior notes with a principal balance of €500 million ($566 million) matured and were repaid in full. On April 1, 2020, our 8.375% senior notes with a principal balance of $424 million matured and were repaid in full.
Debt Issuances
On March 24, 2020 we issued four series of notes, in the following principal amounts: $1.0 billion, $750 million, $500 million and $1.25 billion. These notes bear interest at 3.90%, 4.45%, 5.20% and 5.30%, respectively, and will mature on April 1, 2025, April 1, 2030, April 1, 2040 and April 1, 2050, respectively. Interest on the notes is payable semi-annually, beginning October 2020. Each series of notes is callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of scheduled payments of principal and interest, plus accrued and unpaid interest.
In such event, the present values of scheduled principal and interest payments are discounted to the redemption date on a semi-annual basis at the discount rate of the Treasury Rate plus 50 basis points, and are determined as follows:
On the 3.90% notes, payments from the redemption date until one month prior to maturity
On the 4.45% notes, payments from the redemption date until three months prior to maturity
On the 5.20% and 5.30% notes, payments from the redemption date until six months prior to maturity
Fixed-Rate Senior Notes
All of our fixed-rate notes pay interest semi-annually, and allow for redemption by UPS at any time by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. We subsequently entered into interest rate swaps on several of these notes, which effectively converted the fixed interest rates on the notes to variable LIBOR-based interest rates. The average interest rate payable on the notes where fixed interest rates were swapped to variable-based interest rates, including the impact of the interest rate swaps, for 2020 and 2019 were as follows:
Principal Average Effective Interest Rate
Value Maturity 2020 2019
5.125% senior notes
$ 1,000  2019 —  % 4.48  %
3.125% senior notes
1,500  2021 1.60  % 2.59  %
2.450% senior notes
1,000  2022 1.55  % 3.03  %
8.375% Debentures
The 8.375% debentures consist of two separate tranches, as follows:
$276 million of the debentures have a maturity of April 1, 2030. These debentures have an 8.375% interest rate until April 1, 2020, and, thereafter, the interest rate will be 7.62% for the final 10 years. These debentures are redeemable in whole or in part at our option at any time. The redemption price is equal to the greater of 100% of the principal amount and accrued interest, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption (at a benchmark treasury yield plus five basis points) plus accrued interest.
$424 million of the debentures matured and were paid in full on April 1, 2020. These debentures were not subject to redemption prior to maturity.
Interest is payable semi-annually in April and October for both tranches and neither tranche is subject to sinking fund requirements. We subsequently entered into interest rate swaps on the 2020 debentures, which effectively converted the fixed interest rates on the debentures to variable LIBOR-based interest rates. The average interest rate payable on the 2020 debentures, including the impact of the interest rate swaps, for 2020 and 2019 was 6.66% and 7.20%, respectively.
Floating-Rate Senior Notes
The floating-rate senior notes, with principal amounts totaling $1.0 billion, bear interest at either one or three-month LIBOR, less a spread ranging from 30 to 45 basis points. The average interest rate for 2020 and 2019 was 0.40% and 2.05%, respectively. These notes are callable at various times after 30 years at a stated percentage of par value, and putable by the note holders at various times after one year at a stated percentage of par value. The notes have maturities ranging from 2049 through 2067. We classified the floating-rate senior notes that are putable by the note holder as long-term liabilities in our consolidated balance sheets, due to our intent and ability to refinance the debt if the put option is exercised by the note holder.
The remaining three floating-rate senior notes in the principal amounts of $350, $400 and $500 million, bear interest at three-month LIBOR, plus a spread ranging from 15 to 45 basis points. The average interest rate for 2020 and 2019 was 1.29% and 2.82%, respectively. These notes are not callable. The notes have maturities ranging from 2021 through 2023.
Finance Lease Obligations
We have certain property, plant and equipment subject to finance leases. For additional information on finance lease obligations, see note 11.
Facility Notes and Bonds
We have entered into agreements with certain municipalities or related entities to finance the construction of, or improvements to, facilities that support our operations in the United States. These facilities are located around airport properties in Louisville, Kentucky; Dallas, Texas; and Philadelphia, Pennsylvania. Under these arrangements, we enter into a lease or loan agreement that covers the debt service obligations on the bonds issued by these entities, as follows:
Bonds with a principal balance of $149 million issued by the Louisville Regional Airport Authority associated with our Worldport facility in Louisville, Kentucky. The bonds, which are due in January 2029, bear interest at a variable rate, and the average interest rates for 2020 and 2019 were 0.50% and 1.49%, respectively.
Bonds with a principal balance of $42 million and due in November 2036 issued by the Louisville Regional Airport Authority associated with our air freight facility in Louisville, Kentucky. The bonds bear interest at a variable rate, and the average interest rates for 2020 and 2019 were 0.56% and 1.49%, respectively.
Bonds with a principal balance of $29 million issued by the Dallas / Fort Worth International Airport Facility Improvement Corporation associated with our Dallas, Texas airport facilities. The bonds are due in May 2032 and bear interest at a variable rate, however the variable cash flows on the obligation have been swapped to a fixed 5.11%.
Bonds with a principal balance of $100 million issued by the Delaware County, Pennsylvania Industrial Development Authority associated with our Philadelphia, Pennsylvania airport facilities. These bonds, which are due September 2045, bear interest at a variable rate. The average interest rate for 2020 and 2019 was 0.62% and 1.48%, respectively.
Pound Sterling Notes
The Pound Sterling notes consist of two separate tranches, as follows:
Notes with a principal amount of £66 million accrue interest at a 5.50% fixed rate, and are due in February 2031. These notes are not callable.
Notes with a principal amount of £455 million accrue interest at a 5.125% fixed rate, and are due in February 2050. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount plus accrued interest, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark U.K. government bond yield plus 15 basis points, plus accrued interest.
Canadian Dollar Senior Notes
The Canadian Dollar notes consist of a single series, as follows:
Notes in the principal amount of C$750 million, which bear interest at a 2.125% fixed interest rate and mature in May 2024. Interest on the notes is payable semi-annually. The notes are callable at our option, in whole or in part, at the Government of Canada yield plus 21.5 basis points and on or after the par call date, at par value.
Euro Senior Notes
The Euro notes consist of three separate issuances, as follows:
Notes in the principal amount of €500 million accrue interest at a 1.00% fixed rate and are due in November 2028. Interest is payable annually on the notes. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable German government bond yield plus 15 basis points, plus accrued interest.
Notes with a principal amount of €700 million accrue interest at a 1.625% fixed rate and are due in November 2025. Interest is payable annually on the notes. These notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark German government bond yield plus 20 basis points, plus accrued interest.
Notes with principal amounts of €700 million and €500 million accrue interest at 0.375% and 1.50% fixed rates, respectively, and are due in November 2023 and November 2032, respectively. Interest on these notes is payable annually. The notes are callable at our option at a redemption price equal to the greater of 100% of the principal amount, or the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption at a benchmark comparable government bond yield plus 10 and 20 basis points, respectively, plus accrued interest.
Contractual Commitments
The following table sets forth the aggregate annual principal payments due under our long-term debt and the aggregate amounts expected to be spent for purchase commitments (in millions):
Year Debt Principal Purchase
Commitments
2021 $ 2,568  $ 2,730 
2022 2,001  1,415 
2023 2,360  404 
2024 1,485  201 
2025 1,860  60 
After 2025 14,198 
Total $ 24,472  $ 4,811 
As of December 31, 2020, we had outstanding letters of credit totaling approximately $1.4 billion issued in connection with our self-insurance reserves and other routine business requirements. We also issue surety bonds as an alternative to letters of credit in certain instances, and as of December 31, 2020, we had $1.3 billion of surety bonds written.
Sources of Credit
We maintain two credit agreements with a consortium of banks. The first of these agreements provides revolving credit facilities of $2.0 billion, and expires on December 7, 2021. Amounts outstanding under this agreement bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus a margin of 0.875%. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; or (3) LIBOR for a one-month interest period plus 1.0%, may be used at our discretion.
The second agreement provides revolving credit facilities of $2.5 billion, and expires on December 11, 2023. Amounts outstanding under this facility bear interest at a periodic fixed rate equal to LIBOR for the applicable interest period and currency denomination, plus an applicable margin. Alternatively, a fluctuating rate of interest equal to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in the United States; (2) the Federal Funds effective rate plus 0.50%; and (3) LIBOR for a one month interest period plus 1.00%, plus an applicable margin, may be used at our discretion.
The applicable margin for advances bearing interest based on LIBOR is a percentage determined by quotations from Markit Group Ltd. for our one-year credit default swap spread, subject to a minimum rate of 0.10% and a maximum rate of 0.75% per annum. The rate is interpolated for a period of time from the date of determination of such credit default swap spread in connection with a new interest period until the latest maturity date of the facility then in effect (but not less than a period of one year).
The applicable margin for advances bearing interest based on the prime rate is 1.00% below the applicable margin for LIBOR advances (but not lower than 0%). We are also able to request advances under these facilities based on competitive bids for the applicable interest rate. There were no amounts outstanding under these facilities as of December 31, 2020.
Debt Covenants
Our existing debt instruments and credit facilities subject us to certain financial covenants. As of December 31, 2020 and for all prior periods presented, we have satisfied these financial covenants. These covenants limit the amount of secured indebtedness that we may incur, and limit the amount of attributable debt in sale-leaseback transactions, to 10% of net tangible assets. As of December 31, 2020, 10% of net tangible assets is equivalent to $4.0 billion; however, we have no covered sale-leaseback transactions or secured indebtedness outstanding. We do not expect these covenants to have a material impact on our financial condition or liquidity.
Fair Value of Debt
Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $28.3 and $26.9 billion as of December 31, 2020 and 2019, respectively. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of all of our debt instruments.