The rating actions reflect the announcement, by Netherlands-based courier, express, and parcels company TNT Express N.V., that U.S.-based United Parcel Service Inc. (UPS) sees no realistic prospect that the sale of PostNL’s share in TNT Express to UPS will gain European Commission clearance on the current terms, and that UPS will not pursue the sale on revised terms. Consequently, UPS plans to withdraw its offer to buy PostNL’s share in TNT Express when the European Commission delivers its anticipated formal decision to prohibit the sale, which is due by Feb. 5, 2013.
PostNL was planning to sell the 29.8% share it owns in TNT Express to UPS for a cash consideration of EUR1.54 billion. It was also planning to use part of the proceeds to reduce its net debt to EUR300 million-EUR500 million. Since the sale is unlikely to proceed, we no longer see any potential for PostNL to improve its financial risk profile from our current assessment of “significant” in the short term. Such improvement would have depended on PostNL achieving Standard & Poor‘s-adjusted funds from operations (FFO) to debt of 45%, on a sustainable basis. While this no longer appears feasible, we understand that PostNL still plans to monetize its stake in TNT Express in the medium term, although we have no visibility on whether it would be able to achieve a comparable offer to that from UPS.
Furthermore, we consider that PostNL’s business risk profile is under persistent pressure from the weak economic environment in The Netherlands and from the company’s participation in the European mail industry, which continues to be subject to a structural volume decline. This decline, along with fierce competition and relatively high labor costs, has placed pressure on PostNL’s profitability and has led the company 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 a rate of decline similar to that in the third quarter persists, and the pressure on the company’s profitability continues, this could weigh negatively on our current assessment of the company’s business risk profile as “strong”.
The short-term rating on PostNL is ‘A-2’. We view PostNL’s liquidity as “strong” under our criteria, reflecting our calculation that the company’s sources of liquidity exceed its uses by 1.5x or more over the next 24 months. We anticipate that net liquidity sources would remain positive even if EBITDA were to decline by 30%. We understand that PostNL has well-established, solid relationships with banks, and a high standing in the 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;
-- 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.
The negative outlook reflects our view that PostNL might be not able to maintain its ratings-commensurate business risk profile amid difficult operating conditions stemming from the weak economic outlook, the structural volume decline in The Netherlands’ mail market, and the resulting pressure on the company’s profitability.
Moreover, negative rating pressure could arise if PostNL adopts a more aggressive financial policy, thereby weakening its credit metrics to levels below those we consider commensurate with a “significant” financial risk profile. We consider a ratio of adjusted FFO to debt of more than 25%, on a sustainable basis, as commensurate with the current rating.
We will look to update our views after PostNL’s release of its year-end 2012 results and our review of its business and financial strategies--in particular, the aggressiveness of its discretionary spending, and its earnings and cash flow prospects.
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
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 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
-- 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
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Corporate Credit Rating BBB/Negative/A-2 BBB/Watch Pos/A-2
Senior Unsecured BBB BBB/Watch Pos