TEXT-S&P keeps PostNL on watch positive, affirms 'A-2' rating

Tue Dec 18, 2012 11:27am EST

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 likely one notch once the sale is complete, and pending our review 
of PostNL's business risk profile, operating strategy, and financial policy. 

Rating Action
On Dec. 18, 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 
likely one notch 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. 
The number of notches of upgrade depends on the amount of debt repaid.

We 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. However, the final amount of debt repayment may be more 
than this amount. 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, which we currently assess as 
"significant." 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%. We may revise this guideline if we assess 
that PostNL's business risk profile has changed. We currently assess PostNL's 
business risk profile as "strong."

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 about EUR200 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. Our current assessment of "strong" 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 weakening 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. 

In addition, we note that the volumes of addressed mail in The Netherlands 
declined more in the third quarter of 2012 than we previously anticipated and 
we forecast a continued decrease in mail volumes. If the level of decline in 
the third quarter is sustained, this could weigh negatively on our assessment 
of the group's business risk profile.

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%. We understand that the company has well-established, 
solid relationships with banks and a high standing in credit markets.

Liquidity sources to September 2013 are:
     -- About EUR398 million of cash and cash equivalents as of Sept. 30, 2012, 
of which about EUR50 million are restricted; and
     -- A EUR570 million undrawn committed revolving credit facility due May 
2016.

Uses of liquidity to September 2013 include:
     -- About EUR50 million of negative unadjusted FFO under our base-case 
forecast for 2012, including EUR84 million in top-up payments to pension funds, 
to be paid in December 2012;
     -- Our forecast of working capital needs of about EUR45 million;
     -- Capital expenditures of about EUR200 million; and
     -- About EUR60 million of debt maturities.

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 
likely one notch, subject to our positive review of PostNL's financial risk 
profile and our assessment of the company's business risk profile in light of 
its full-year results and outlook for the mail business in the Netherlands. 
The review will focus in particular on PostNL's intentions for the proceeds of 
the TNT Express disposal, and PostNL's future financial policy. 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.
     -- TNT Express 'BBB+/A-2' Ratings Remain On CreditWatch Positive On 
Further Extension Of UPS Offer Period, Nov. 28, 2012
     -- PostNL 'BBB' L-T Rating Kept On CreditWatch Positive Pending Sale Of 
Stake In TNT Express; 'A-2' S-T Rating Affirmed, Sept. 26, 2012
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- UPS Inc. 'AA-' And 'A-1+' Ratings Remain On CreditWatch Negative, Aug. 
28, 2012
     -- PostNL 'BBB/A-2' Ratings Remain On CreditWatch Positive On Commitment 
To Tender Share In TNT Express, June 28, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed

PostNL N.V.
 Corporate Credit Rating                BBB/Watch Pos/A-2  
  Senior Unsecured Debt                 BBB/Watch Pos      


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