RPT-Fitch Affirms Deutsche Post at 'BBB+'; Outlook Stable
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Jan 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Deutsche Post AG a€™s (DP) Long-term Issuer Default Rating (IDR) and senior unsecured rating at a€˜BBB+a€™ and Short-term IDR at a€™F2'. The Outlook on the Long-term IDR is Stable. Deutsche Post Finance B.V. senior unsecured rating has also been affirmed at a€˜BBB+a€™.
The affirmation reflects DPa€™s balanced risk profile and solid operating performances which contribute to maintain credit metrics in line with guidance for the current rating. The company maintains financial flexibility to cope with structural pressures, uncertain economic outlook and volatility in the DHL segment.
KEY RATING DRIVERS
Balanced Risk Profile
The weaker than anticipated economic environment and negative foreign exchange dynamics continue to affect DPa€™s DHL Global Forwarding and Freight (GFF) division. However, in the first nine months of 2013, DP reported improving operating profits (+7.5% yoy) thanks to strict cost control throughout the group and improving performances of the Mail division, driven by the continuous growth of the domestic parcel business. This reflects DPa€™s balanced risk profile, which benefits from the stable, albeit structurally declining, contribution of the more traditional mail products and innovative parcel business in the domestic market and the more cyclical and competitive nature of the DHL divisions (Express, GFF and Supply Chain).
DHL Businesses Exposed to Volatility
DPa€™s exposure to global market volatility remains a major constraint on its credit profile. However, while all DHLa€™s divisions are directly correlated with GDP dynamics, GFF performance is also affected by intra-modal transport competition (air to ocean), which can exacerbate volatility. In the first nine months of 2013, DHL Express volumes and revenues increased in almost all DHLa€™s served regions, while GFF performance was negatively impacted by lower volumes and the negative market dynamics between air and ocean modes, due the increasing differential in pricing efficiencies in favor of ocean, a situation we do not consider will change in the short term.
Mail Diversification Offsets Volumes Decline
Declining traditional mail volumes and revenues continue to be offset by domestic parcels contribution (25.1% revenues in 9M 2013 from 22.8% in 2011). This trend is expected to continue and support DPa€™s mail margins. However, mounting competitive pressure is likely to squeeze profitability margins, despite encouraging market potential for this service driven by higher than expected increase of e-commerce volumes in Germany in both the B2B and B2C segments. Wages are the most relevant competitive factor and they significantly vary between the different operators currently in the market, DP is at the high side of the range. In order to cope with increasing volumes DP is deploying significant investments in sorting capacity. Furthermore mail revenues will benefit from rate increases introduced in 2013 and 2014.
Comfortable Financial Profile
DP maintained its financial flexibility in 2013. The Stable Outlook reflects that there is no immediate pressure on leverage and sufficient financial headroom to face potential greater volatility in 2014-15. Fitch forecasts positive free cash flow over the next three years after average capex of EUR1.7bn per year and 50% dividend pay-out. Fitcha€™s forecast FFO adjusted net leverage for YE13 is 3.4x, down from 3.9x at YE12 after the completion of the pension funding transaction, which increased debt at YE12 to EUR4.8bn from EUR3.6bn at 3Q12.
New Accounting Pension Treatment Neutral
There is no material impact from the change in the accounting pension treatment (IAS19). Fitcha€™s calculation of pension deficit is not altered under the revised rules as it is already adjusted to reflect unrecognised actuarial gains or losses. DP used the corridor exemption approach for its defined benefit scheme, which allowed a portion of their pension liability to remain unrecognised off-balance sheet; DPa€™s unrecognised actuarial losses at YE12 amounted to EUR3.082bn. Under the revised accounting standard rule, unrecognised gains and losses will be included within net pension provisions. As a result of the pension funding transaction in 4Q12, DPa€™s net pension provision decreased to EUR1.9bn from EUR3.9bn. However, under the revised IAS19 standard, DPa€™s pro-forma YE12 net pension provision is EUR4.9bn.
DPa€™s liquidity is adequate and includes a recently renegotiated EUR2bn syndicated revolving facility due 2018 and available cash of EUR1bn as of September 2013. In 4Q13 DP issued EUR1bn in five and seven-year tranches that will refinance the bond maturing in January 2014. DPa€™s average cost of new debt is below 2.5%, supporting strong FFO interest coverage. However, at less than 3.0x, Fitch calculated fixed charge coverage (including operating leasing averaging EUR1.7bn per year of non-cancellable leases) for DP is tight for the rating.
The current Rating Outlook is Stable. As a result, Fitcha€™s sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating change. Future developments that may nonetheless, individually or collectively, lead to rating action include: Negative: FFO lease adjusted net leverage above 3.5x on a sustained basis and further weakening of FFO fixed charges coverage; significant deterioration in business fundamentals due to a protracted economic downturn or structural changes leading to significant volume; and margins reduction in the DHL divisions and consistently negative free cash flows.
FFO lease adjusted net leverage below 2.5x and FFO fixed charge coverage above 3.5x on a sustained basis; an improving macro-economic outlook supporting performances of DHLa€™s divisions; and continued success in expanding the domestic parcel business to compensate declining traditional mail profits supporting free cash flow generation.
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