The credit rating assigned to Russian Post (the Company) is a result of very high systemic importance of the Company for the Russian economy, very high influence of the government on the Company, very strong market positions, strong business profile, medium level of corporate governance (which is cause by the legal form of the Company), large size, and medium profitability and leverage. The standalone creditworthiness assessment (SCA) is restricted by weak liquidity and cash flow and low interest coverage.
The Company is the operator of the Russian government postal network, operating in all regions of the country, except the Republic of Crimea and Sevastopol. The Company's product range includes all types of postal services (delivery of written correspondence and postal items, international postal service, etc.), money transfers and delivery of pension payments, utility payments, and it acts as a consumer goods supplier in remote settlements. In 2017, the Company processed 2.4 billion postal items, delivered 365 million parcels and made money transfers and the delivery of pensions for a total of RUB 3.2 trillion. The Company owns 42,000 post offices, 90 branches, 51 sorting centers, about 17,000 motor vehicles, more than 790 postal railway cars, and two airliners. The Company employs more than 350 thousand people. The Company is 100% state-owned; it is expected to be corporatized in the near future, but the government is expected to retain a 100% control over the Company.
Key rating assessment factors
Systemic importance of the Company and the degree of state influence on the Company are assessed as very high. The Company is a key player in the postal services sector, and it is present in all regions throughout Russia. A substantial amount of pension contributions and utility payments is transferred through the Company, which makes the Company a systematically important element in the national system of payments. The Company is the fourth largest employer in Russia. The Company's legal form is federal state unitary enterprise (FSUE), but even after the expected corporatization, the government is expected to retain full shareholding and operational control over the Company. The Company received subsidies to replenish its railcar fleet; in 2015 and 2016, its bonds were purchased on special terms by Vnesheconombank and the Far East Development Fund. In addition, since 2017, the Ministry of Industry and Trade has subsidized the Company's purchases of aircraft. At the regional level, the extraordinary support from the state is expressed in lower taxes and other deductions paid by the local branches of the Company. The Company is included in the list of strategic enterprises of the country, therefore, in accordance with Art. 191 of Federal Law No. 127 "On Insolvency (Bankruptcy)", the state ensures the prevention of bankruptcy events of the Company, including by way of government guarantees. In 2017, the authorized capital of the Company was increased from RUB 83.3 million up to RUB 243.1 million. All the above factors indicate a very high degree of state influence.
Strong business profile stems from: 1) medium quality infrastructure, which, however, allows the Company to provide a full range of postal and communications services; 2) very high assessment for the infrastructure ownership model, as almost all areas occupied by post offices, as well as all motor vehicles, air and railway transport belong to the Company; 3) high assessment for services diversification, as the revenue is stable in the segment of postal items and grows steadily in the trade segment. The assessment for geographical diversification is very high, as the Company operates virtually throughout the country and sends mailings to 150 million addresses, including individuals and corporates outside the Russian Federation.
Medium leverage and low coverage. According to ACRA estimates, the average weighted ratio of the Company's adjusted total debt to FFO before fixed charges may amount to 4.6x in the period from 2015 to 2020. At the same time, the quality assessment of the Company's leverage is high due to the comfortable debt maturities. However, it should be noted that certain bond issues have high interest rates, since the securities were placed in 2012–2016, when the CBR's key rate was high, and the Company's investment program for 2018–2020 would require an increase in the leverage. Those factors taken together result in a low coverage of 2.0x.
Weak liquidity of the Company is associated with a small number of open credit lines, since most of the loan portfolio is represented by bond loans, which are intended to finance the investment program. A qualitative assessment of liquidity is high due to a comfortable schedule of debt repayments in the medium term and the access to financing from large state-owned banks.
Weak cash flow is caused by significant capital investments: in 2018–2020, the Company would spend up to RUB 90 billion to upgrade the logistics chain for faster deliveries throughout the territory of the Russian Federation. ACRA predicts a decrease in the FCF margin from 2% in 2017 down to -12 to -20% by 2019–2020. The capital expenditures to revenue ratio is expected to grow from 5% in 2017 to 13–26% by 2019–2020.
Key assumptions
- Revenues to grow in line with the Company’s Strategy until 2018;
- Company’s costs to grow in line with inflation expectations of ACRA;
- Public debt to be repaid in line with offer dates;
- The Company to remain the sole state-owned postal network operator that delivers, among others, official notices sent by state authorities.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A negative rating action may be prompted by:
- A significant decline of the Company’s systemic importance for the Russian economy;
- A loss of state control over the Company or substantial changes in the industry laws.
Rating components
SCA: а-.
Support: on par with RF.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to Russian Post for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (April 20, 2018).
The assigned credit rating is based on the data provided by Russian Post, information from publicly available sources as well as ACRA’s own databases. The credit rating is solicited, and Russian Post participated in its assignment.
Disclosure of deviations from the approved methodologies: the 'profitability' factor has been assessed not in line with the assessment range set forth in the methodology. This deviation was due to the specifics of providing postal services.
No material discrepancies between the provided data and the data officially disclosed by Russian Post in its financial statements have been discovered.
ACRA provided no additional services to Russian Post. No conflicts of interest were discovered in the course of credit rating assignment.
