ACRA has downgraded the credit rating of Russian Post (hereinafter, Russian Post, or the Company) due to its extremely weak financial performance in 2022, which was not reinforced by extraordinary support from the state. The rating downgrade was also prompted by ACRA’s expectations that financial metrics will probably not recover earlier than 2025. In 2022, Russian Post substantially increased its labor remuneration expenses amid a moderate decline in revenues, which led to FFO before fixed payments moving into negative territory (RUB -19.9 bln as of the end of 2022) and had an adverse impact on financial risk profile assessments. The Agency assumes that financial metrics will not return to their 2021 level until 2025, which may be facilitated by the introduction of infrastructure payment for companies in the e-commerce sector. However, the issue of this payment is currently under discussion and there is no certainty regarding its timing, final form, and the scale of the future monetary effect for the Company.
The credit rating of Russian Post reflects the high level of support from the state and the low dependence of the state and the Company on homogenous risk factors.
The rating is determined by Russian Post’s strong position in the market of socially significant postal and communication services, as well as its strong business profile. The latter is due to the high diversification of the services provided by the Company and the developed transport and logistics infrastructure that allows it to provide public and social services to the population throughout Russia. The financial risk profile is characterized by strong liquidity amid a medium level of profitability. However, the negative results of 2022 led to higher leverage and weakened the debt service and cash flow indicators, which constrains the credit rating. At the same time, ACRA notes that the liquidity cushion and significant volume of uncommitted credit lines support the Company’s rating.
Russian Post is Russia’s largest federal postal and logistics operator, operating in all regions of the country. The Company’s product range includes all types of postal services (delivery of written correspondence and postal items, international postal service, etc.), money transfers, delivery of pension payments, utility payments, and logistics services for online retailers. The Company is wholly owned by the state.
KEY ASSESSMENT FACTORS
High degree of support from the state. The nationwide social role of Russian Post and its significant contribution to developing the Russian economy determine the high degree of state support, which as per ACRA’s methodology reflected by very high scores for the Barriers and Restrictions and Social Role sub-factors, as well as high scores for the Propensity to Provide Support, Exclusivity of Functions, and Ownership, Control, and Regulation sub-factors. The state exercises strategic and operational control over the Company’s activities and influences its financial stability by directly or indirectly subsidizing its operations. The board of directors is formed by the Government of the Russian Federation and is largely made of representatives of government bodies. The exclusivity of the functions performed by Russian Post is expressed in the provision of postal and communication and payment services, including pension payments and payment for housing and communal services, in more than 38,000 stationary and mobile locations in all the cities and rural settlements of the Russian Federation.
Medium profitability and large size of business. The Company’s revenues amounted to RUB 221.2 bln in 2022, having declined by 3% compared to 2021. At the same time, revenues from digital sales (the websites pochta.ru and otpravka.pochta.ru, the Russian Post mobile application, etc.) channels grew by 17% in 2022 (to RUB 61.8 bln), which is the result of the gradual transfer of classic postal services to a modern digital format via online channels. The decline in consolidated revenues was mainly due to last year’s sanctions crisis, including in the international delivery segment.
Strong business profile. Russian Post provides all the main types of postal services throughout the country (correspondence delivery, parcel dispatch, express delivery, subscription services for periodicals) along with payment acceptance, money transfers and payment of pensions. The Company owns all or almost all of its infrastructure, including its branches, post offices, sorting centers, and the transport fleet. ACRA assesses the diversification of the Company’s services as high.
Very high leverage and medium debt service. As of June 30, 2023, Russian Post’s debt (excluding the lease portfolio) was RUB 118 bln (at the level of the end of 2022). 83% of the portfolio is made up of bonds, while a 17% share is loans. Debt liabilities are denominated in rubles and have been raised largely at fixed rates. The weighted average ratio of adjusted total debt to FFO before fixed payments exceeds 5.0x. The weighted average ratio of FFO before fixed payments to fixed payments was 2.6x.
Strong liquidity and weak cash flow. The Company will have to refinance a substantial part of its debt portfolio in H2 2023. As of June 30, 2023, the Company had a significant volume of open undrawn credit lines, which allow the liquidity assessment to be maintained at a high level. The low volume of dividend payments and limited capital expenditures provide certain support to the free cash flow (FCF), which, however, is under significant pressure due to the low profitability and the Company’s negative financial results in 2022. The Agency estimates that the weighted average FCF margin has turned negative and stands at -5.6%.
KEY ASSUMPTIONS
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The Company continuing to be the state’s only postal operator, including in terms of sending state notifications, fines, and announcements;
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Maintaining and broadening regular state support measures for the Company.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Developing outlook assumes a variety of trends: the rating may stay unchanged, be upgraded or downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average leverage indicators returning to above 5.0x coupled with growth of the coverage ratio to much higher than 2.5x;
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Substantial broadening of extraordinary support from the state.
A negative rating action may be prompted by:
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Loss of complete control by the state;
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Decline in the Company’s systemic importance to the state;
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Reduction or stoppage of state support measures;
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Weighted average FFO before fixed payments to fixed payments declining below 1.0x;
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Deterioration of the Company’s liquidity position.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): a-.
Support: state — SCA plus five notches.
ISSUE RATINGS
Russian Post, BO-001P-04 series (RU000A0ZZ5H3); maturity date: April 24, 2028, issue volume: RUB 5 bln —
АА+(RU).
Russian Post, BO-001P-05 series (RU000A0ZZ5J9); maturity date: April 24, 2028, issue volume: RUB 5 bln —
АА+(RU).
Russian Post, BО-001P-06 series (RU000A100SZ3); maturity date: August 23, 2029, issue volume: RUB 5 bln —
АA+(RU).
Russian Post, BО-001P-07 series (RU000A1008Y3); maturity date: March 27, 2029, issue volume: RUB 5 bln —
АA+(RU).
Russian Post, BО-001P-08 series (RU000A100UT2); maturity date: September 11, 2029, issue volume: RUB 5 bln —
АA+(RU).
Russian Post, BО-001P-09 series (RU000A102E52); maturity date: November 13, 2030, issue volume: RUB 5 bln —
АA+(RU).
Russian Post, BО-001P-10 series (RU000A101ZH4); maturity date: July 23, 2030, issue volume: RUB 10 bln —
АA+(RU).
Russian Post, BO-002P-01 (RU000A104V75); maturity date: May 26, 2032, issue volume: RUB 10 bln —
АA+(RU).
Russian Post, BO-002P-03 (RU000A104W33); maturity date: June 8, 2032, issue volume: RUB 10 bln —
АA+(RU).
Russian Post, BO-002P-02 (RU000A104W17); maturity date: June 8, 2032, issue volume: RUB 10 bln —
АA+(RU).
Russian Post, BO-002P-04 (RU000A1055Y4); maturity date: August 25, 2032, issue volume: RUB 20 bln —
АA+(RU).
Rationale. The issues represent senior unsecured debt of Russian Post. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, and taking into account the high creditworthiness of the issuer and the absence of any substantial secured debt obligations, ACRA has applied the simplified approach, under which the issues’ credit ratings are equivalent to that of Russian Post, i.e. AA+(RU).
REGULATORY DISCLOSURE
The credit ratings have been assigned to Russian Post and the bond issues (RU000A0ZZ5H3, RU000A0ZZ5J9, RU000A100SZ3, RU000A1008Y3, RU000A100UT2, RU000A102E52, RU000A101ZH4, RU000A104V75, RU000A104W33, RU000A104W17, RU000A1055Y4) of Russian Post under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating assigned to Russian Post was published by ACRA for the first time on April 24, 2018, to bond issues RU000A0ZZ5H3 and RU000A0ZZ5J9 on June 4, 2018, to bond issue RU000A100SZ3 on September 9, 2019, to bond issue RU000A1008Y3 on April 10, 2019, to bond RU000A100UT2 on September 25, 2019, to bond issue RU000A102E52 on November 25, 2020, to bond issue RU000A101ZH4 on August 4, 2020, to bond issue RU000A104V75 on June 8, 2022, to bond issues RU000A104W33 and RU000A104W17 on June 21, 2022, and to bond issue RU000A1055Y4 on September 7, 2022. The credit rating of Russian Post and its outlook, as well as the credit ratings of the bond issues of Russian Post, are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by Russian Post, information from publicly available sources, and ACRA’s own databases. The credit ratings are solicited and Russian Post participated in their assignment.
Disclosure of deviations from the approved methodologies: the Profitability factor was not assessed in line with the assessment range specified in the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, due to the specifics of the postal service business.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Russian Post. No conflicts of interest were discovered in the course of credit rating assignment.
