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