TEXT-S&P keeps PostNL 'BBB' rating on watch positive
Overview -- Netherlands-based mail company PostNL N.V. is selling its 29.8% share in Netherlands-based courier, express, and parcels company TNT Express N.V. to United Parcel Service Inc. for about EUR1.54 billion. The tender process is continuing as planned, but is subject to regulatory approval. -- We understand that PostNL's management plans to use a large part of the proceeds of the sale for net debt reduction. If this materializes, it could lead us to revise our assessment of the company's financial risk profile upward. -- We are therefore keeping our 'BBB' corporate credit rating on PostNL on CreditWatch positive to reflect that an improvement in the company's financial risk profile could lead to an upgrade. -- The ongoing CreditWatch placement reflects the possibility of an upgrade of up to two notches once the sale is complete, and pending our review of PostNL's operating strategy and financial policy. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services kept its 'BBB' long-term corporate credit and senior unsecured debt ratings on Netherlands-based mail company PostNL N.V. on CreditWatch, where they were originally placed with positive implications on March 26, 2012. At the same time, we affirmed our 'A-2' short-term corporate credit rating on PostNL. Rationale The ongoing CreditWatch placement reflects the potential for an upgrade of up to two notches if we revise our assessment of PostNL's financial risk profile upward following the sale of its 29.8% share in Netherlands-based courier, express, and parcels company TNT Express N.V. (BBB+/Watch Pos/A-2) to United Parcel Service Inc. (A+/Negative/A-1) for a cash consideration of about EUR1.54 billion. We understand that the tender process is continuing as planned, but remains subject to certain regulatory approvals and competition clearance. We further understand that on completion of the sale, PostNL's management will put EUR700 million of the proceeds into an escrow account, to be subsequently used for debt repayment. We note that this plan is consistent with PostNL's previously stated intention to reduce its net debt to EUR300 million-EUR500 million with the proceeds from disposals of financial assets. Accordingly, we anticipate an improvement in PostNL's credit ratios and, therefore, its financial risk profile. We estimate that the company's Standard & Poor's-adjusted funds from operations (FFO) to debt will rise to 35% or more, depending on the final amount of net debt reduction. We could raise the rating if PostNL were to comfortably sustain an "intermediate" financial risk profile, translating into adjusted FFO to debt of about 35%. PostNL's financial risk profile is currently "significant." Any decision to raise the rating would, however, depend on management's financial policy and medium-term plans for capital spending, dividends, and possible bolt-on acquisitions. For example, we understand that PostNL's capital spending might increase to EUR240 million in 2012, which, combined with large cash outlays for restructuring and pension contributions, would result in negative free operating cash flow under our base-case credit assumptions. A potential upgrade will be also subject to our review of PostNL's business risk profile, which we currently assess as "strong." This is supported by the company's good track record of maintaining better operating efficiency in its core Dutch mail business than its European postal peers, as well as improving its international business. We see pressure on the business risk profile, however, in view of the weak economic environment in The Netherlands and the company's participation in the European mail industry, which is subject to a structural volume decline. This decline, along with competition and relatively high labor costs, has placed pressure on profitability and has led PostNL to restructure its mail business in The Netherlands. We note that this is a complex program of change and that the effects of reorganization have been more extensive than we originally anticipated. Liquidity The short-term rating on PostNL is 'A-2'. We view PostNL's liquidity as "strong" under our criteria, reflecting that the company's sources of liquidity exceed uses by 1.5x or more over the next 24 months. We also anticipate that net liquidity sources would remain positive, even if EBITDA were to decline by 30%. PostNL's credit facilities and bonds do not contain financial covenants and are not subject to rating triggers. We understand that the company has well-established, solid relationships with banks and a high standing in credit markets. As of June 30, 2012, PostNL had EUR483 million of cash and cash equivalents, of which about EUR40 million were restricted. We understand that the company also had access to a EUR570 million undrawn committed revolving credit facility due May 2016. This, together with our base-case forecast of unadjusted FFO of about EUR50 million, should enable PostNL to comfortably service its upcoming financial obligations. Uses of liquidity in 2012 include: -- About EUR60 million of debt maturities; -- Our forecast of working capital needs of EUR50 million-EUR60 million; and -- Capital expenditures of a maximum of EUR240 million. We note that debt maturities in 2013 and 2014 are immaterial. PostNL's next significant maturity falls due in 2015 when a EUR400 million bond matures. CreditWatch The CreditWatch positive placement indicates the potential for an upgrade of up to two notches, subject to a positive review of PostNL's financial and business risk profiles. The review will focus in particular on PostNL's intentions for the proceeds of the TNT Express disposal and PostNL's future financial policy. In addition, we will seek to update our views on the company's level of business risk and its near- to medium-term operating performance in light of the structural decline in the mail business in The Netherlands. If we revise our assessment of PostNL's business risk profile downward, for example to "satisfactory" from "strong," it is less likely that the upgrade would be more than one notch. We aim to resolve the CreditWatch placement after the completion of our review. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- PostNL 'BBB/A-2' Ratings Remain On CreditWatch Positive On Commitment To Tender Share In TNT Express, June 28, 2012 -- TNT Express 'BBB+/A-2' Ratings Placed On CreditWatch Positive On Perceived Likelihood Of Acquisition By UPS, Feb. 24, 2012 -- United Parcel Service 'AA-' Ratings Remain On CreditWatch Negative On The Company's Agreement To Acquire TNT Express, March 19, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List CreditWatch Update PostNL N.V. Corporate Credit Rating BBB/Watch Pos/A-2 Senior Unsecured Debt BBB/Watch Pos Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.