Fitch Affirms FSUE Post of Russia at 'BBB-'; Outlook Stable
16 Dec 2016 11:31 AM
Fitch Ratings-Moscow-16 December 2016: Fitch Ratings has affirmed FSUE Post of Russia's (PR) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term Rating at 'AAA(rus)'. The Outlooks are Stable.
Fitch has also affirmed PR's senior unsecured debt ratings at 'BBB-'/'AAA(rus)'.
The affirmation reflects PR's unchanged strategic importance to and close ties with ultimate sovereign sponsor, the Russian Federation (BBB-/Stable/F3).
KEY RATING DRIVERS
PR's ratings are equalised with the sovereign, reflecting the state's 100% ownership and tight control and PR's special legal status. The ratings also factor in PR's unique role as an extension of the government in providing strategically important universal postal services. The equalisation further takes into account the company's operational and financial integration with the sovereign. Fitch views PR as a sovereign credit-linked entity under its "Rating of Public-Sector Entities Criteria" and applies a top-down rating approach from that of the sovereign.
Legal Status assessed as Stronger
Close ties with the state are a key rating factor, which in Fitch's view imply a high likelihood of support, if needed. PR is a national postal operator of regulated and non-regulated services. It has a legal status of federal state unitary enterprise (FSUE), which implies strong legal links with the Russian Federation. Its activity is regulated by the federal law on State and Municipal Unitary Enterprises and law on Post Services. It also has the status of a natural monopoly, ie it is subject to state regulation and monitoring.
Fitch expects PR to be converted from FSUE to public company with 100% state ownership in 2017-2019. The agency views this change as a necessary step in attaining greater operational efficiency without affecting its strong ties with the state, as we do not foresee a decrease of state ownership in the medium term. A decrease of the government's stake in PR below control could be considered rating-negative, implying reduced importance to and, therefore, weaker links with the state.
Strategic Importance assessed as Stronger
PR provides key public services such as universal postal services and money transfer through its extensive post office network. With its approximately 42,000 post offices across the country, PR is often the only state-related entity permanently present in the remote areas of Russia. It performs the highly important function of connectivity for Russia's vast territories by providing access to mail, printed media and delivering social benefits to the elderly (mainly state pensions). It is also a large employer with more than 300,000 employees and legally defined as Russia's postal operator as defined by the Universal Postal Union.
Control assessed as Stronger
The state exercises complete control over PR's activities, including approval of the entity's strategy, appointment of the CEO and state audit of the operations. The company's budget, borrowings and material transactions all have to be authorised by the Ministry of Communications of Russia. Apart from being listed as a natural monopoly, PR has the status of a strategically important entity; therefore its operations and M&A activity are subject to strict government control. We do not envisage any material weakening of this control over the medium term.
Integration assessed as Midrange
PR is distinct from the state in its budget and finances. Its debt is not consolidated in Russia's general government debt. In recent years recurring compensation to PR from the state for its public service mission has decreased significantly (to RUB0.3bn in 2015 from RUB5.5bn in 2014). Fitch expects compensation for subsidised activities to remain negligible in the future. These activities will be cross-subsidised by profitable segments of PR's business.
PR's integration with the state is enabled through strong financial flows between them, and roughly 30% of PR's revenue comes from the public sector. PR acts as a pensions and social benefits payment operator, ie around 40% of all pensions to 15.6 million people are delivered via PR's network. Accordingly PR regularly receives transfers from Pension Fund of Russia and compensation for the service, which constitutes 20% of its revenue. PR also provides services to governmental bodies (9% of PR's revenue), e.g. Federal Tax Service, Ministry of Defence, state centres of traffic management, etc.
The Russian state supports PR's long-term development and modernisation. In 2015 PR received RUB1bn of earmarked subsidies for the purchase of postal train cars directly from the state. PR also receives support from quasi-state development bodies; for example, VEB (state development bank) periodically buys out PR's long-term infrastructure bonds (RUB3bn in December 2015), and in June 2016 Far East Development Fund was mandated by the government to provide RUB1.8bn for PR's logistics centre construction. State-owned Svyaz bank provided 17% of PR's funding as of 30 September 2016.
PR's total revenue grew 6.1% in 2015, following a 5.5% increase in 2014. This was led by parcel delivery as earlier infrastructure investments and new delivery services drove PR's expanding market share. Other positive contributors to revenue growth were retail trade (6.7% yoy) and subscription service (13.6% yoy), while revenue from written correspondence continued its decline (1.9% yoy).
PR's total expenses grew at a slower pace (1.7% yoy) than revenue in 2015, despite a sizable increase in personnel costs, which represent 60% of total costs. This resulted in a 27.8% increase in PR's operating profit in 2015 to RUB1.6bn.
PR's net debt significantly declined to RUB4.2bn at end-2015 from RUB17bn at end-2014, following a two-fold increase in cash. We see this decline as temporary due to "technical" cash hoarding at end-2015 and expect net debt to return to previous levels of RUB17bn-RUB20bn.
Mild Debt Growth
Fitch expects an increase in PR's debt to RUB33.1bn by end-2016 (2015: RUB31.1bn). Debt structure is sound, dominated by long-term domestic bonds at 67% of total debt stock as of 30 September 2016. The company has FX exposure as EUR-denominated loans accounted for 8% of outstanding debt. Those loans are guaranteed by international export credit agencies and are used for the purchase of special postal and sorting equipment. PR has sufficient FX revenue and accumulated cash holdings to more than cover FX-denominated debt servicing.
PR has a sound liquidity buffer. As of 30 September 2016, the company's cash and deposits totalled RUB16.1bn, which fully covers debt due in 2017-2019. Funding is comfortable, underpinned by the company's available committed credit lines of up to RUB10bn and an undrawn bond issuance programme of RUB55bn. This fully offsets immediate and medium- term refinancing risk. Cash holdings are mostly deposited in state-owned banks.
PR's ratings and Outlook are equalised with those of Russia and are likely to mirror them in the medium term.
Weaker links with the state, as reflected in a potential change of legal status leading to material reduction of the state's participation in the company or a lack of financial support in case of a significant deterioration in PR's financial sustainability would be negative for the ratings.
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International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016)
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