TEXT-S&P removes TNT Express from watch pos, affrms rtgs;otlk stbl

Wed Jan 16, 2013 8:07am EST

Jan 16 -

Overview

-- The Netherlands-based courier, express, and parcels company TNT Express N.V. has announced that U.S.-based United Parcel Service Inc. (UPS) sees no realistic prospect of obtaining European Commission clearance for the companies' proposed merger and that UPS will not pursue the transaction on revised terms.

-- We anticipate that UPS will terminate the proposed merger on receiving formal confirmation that the European Commission will not grant regulatory approval, which is due before Feb. 5, 2013.

-- We are therefore removing from CreditWatch positive and affirming our 'BBB+/A-2' long- and short-term corporate credit ratings on TNT Express.

-- The stable outlook reflects our view that TNT Express will be able to improve its operating margins in the medium term through a sustained focus on its European business and cost-control initiatives.

Rating Action

On Jan. 16, 2013, Standard & Poor's Ratings Services removed from CreditWatch with positive implications and affirmed its 'BBB+/A-2' long- and short-term corporate credit ratings on The Netherlands-based courier, express, and parcels company TNT Express N.V. We originally placed the ratings on CreditWatch positive on Feb. 24, 2012. The outlook is stable.

Rationale

The removal of the ratings from CreditWatch positive follows the announcement by TNT Express that U.S.-based United Parcel Service Inc. (UPS; A+/Negative/A-1) sees no realistic prospect of obtaining European Commission clearance for its merger with TNT Express. The European Commission has informed TNT Express that it is likely to prohibit the proposed merger on the current terms. TNT Express has also announced that UPS will not pursue the transaction on revised terms. As such, we anticipate that UPS will withdraw the merger proposal on receiving formal confirmation that the European Commission will not grant regulatory approval, which is due by Feb. 5, 2013. On termination, UPS will pay TNT Express a EUR200 million termination fee.

The CreditWatch positive placement reflected our view that a successful merger with UPS could have improved our assessment of TNT Express' credit quality.

The ratings on TNT Express reflect our view of its "satisfactory" business risk profile, which is supported by TNT Express' position as a leading European and international courier, express, and parcels delivery services integrator. The ratings also reflect our assessment of TNT Express' "modest" financial risk profile.

In our view, these strengths are partially offset by TNT Express' participation in a market that is competitive (especially in Europe) and highly fragmented, its high level of operational leverage, and its exposure to economic cyclicality.

We forecast that TNT Express' Standard & Poor's-adjusted debt will be about EUR1 billion at year-end 2012. We anticipate that this will contribute to an adjusted ratio of debt to EBITDA of about 2x at year-end 2012, which is the same as in 2011. Based on our forecast of adjusted funds from operations (FFO) of about EUR450 million-EUR485 million in 2012, we project that the ratio of adjusted FFO to debt will improve to 45% by the end of 2012, from 42% in 2011.

Liquidity

The short-term rating on TNT Express is 'A-2'. We view TNT Express' liquidity as "strong" under our criteria.

For the 12 months to Sept. 30, 2013, we estimate TNT Express' ratio of liquidity sources to uses to be about 3.5x-4.0x. Sources include our forecasts of:

-- Centralized cash and equivalents of about EUR250 million;

-- About EUR570 million available under a committed credit line that expires in March 2016; and

-- FFO of EUR350 million-EUR375 million (excluding our adjustments).

We estimate TNT Express' liquidity needs over the 12 months as:

-- Short-term borrowings of EUR43 million;

-- Capital expenditure of about EUR220 million, or about 3% of estimated revenues; and

-- Our estimation of the cash element of the dividend for 2012 of about EUR25 million-EUR50 million, in line with TNT Express' stated dividend policy. The cash element has historically varied as the company offers dividends to be paid either in cash or shares.

There are no financial covenant triggers with liquidity implications in the documentation for the undrawn credit line. TNT Express has no debt maturities of more than EUR50 million per year until 2016.

Outlook

The stable outlook reflects our view that TNT Express will be able to improve its operating margins in the medium term through a sustained focus on its European business and cost-control initiatives.

The ratings could come under pressure in the event that TNT Express' financial performance weakens substantially. This could occur if, for example, TNT Express is unable to improve its EBITDA margin as a result of loss of market share or cost pressures. We might consider lowering the ratings if adjusted FFO to debt falls below 45%, debt to EBITDA increases above 2x, or if TNT Express is unable to maintain positive discretionary cash flow. In addition, shareholder-friendly actions could weigh negatively on our ratings assessment.

We view the prospect of an upgrade as remote at this stage, given the industry constraints and uncertainties around TNT Express' strategy following the recent announcement. We understand that management will provide a strategic update shortly, and we will review this as well as the year-end 2012 results. In addition, we do not see the financial risk profile improving over the near term because we anticipate that any significant outperformance would be reinvested or returned to shareholders in some form.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- TNT Express 'BBB+/A-2' Ratings Remain On CreditWatch Positive On Extension Of UPS Offer Period, Aug. 24, 2012

-- TNT Express N.V., May 31, 2012

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link To Parent, Oct. 28, 2004

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action

To From

TNT Express N.V.

Corporate Credit Rating BBB+/Stable/A-2 BBB+/Watch Pos/A-2

TNT Finance B.V.

Commercial Paper* A-2 A-2/Watch Pos

*Guaranteed by TNT Express N.V.

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