Approximately EUR3 billion of rated debt affected
Milan, September 25, 2012 -- Moody's Investors Service has today changed to positive from stable the outlook on the Baa1/Prime-2 (P-2) long-term and short-term ratings of Deutsche Post AG (Deutsche Post), the senior unsecured Baa1 ratings of its guaranteed subsidiary Deutsche Post Finance B.V. and the Baa1/VMIG-2 rating for Industrial Revenue Bonds supported by Deutsche Post and issued by Kenton County Airport Board, KY. Deutsche Post is the Germany's incumbent provider of mail services and the world's largest logistics service provider under its DHL brand.
"Today's change in outlook reflects Deutsche Post's strong performance over the past two years, despite challenging market conditions, and the progress the group has made in restructuring its business in recent years," says Paolo Leschiutta, a Moody's Vice President - Senior Credit Officer and lead analyst for Deutsche Post. "Since its operating and financial difficulties in 2009, the group has achieved ongoing growth in revenues and profits, demonstrating its ability to weather challenging market conditions, and has been able to halt the deterioration in profitability at its German Mail business," adds Mr. Leschiutta. "We expect that Deutsche Post's credit metrics will further improve over the short to medium term, exerting positive pressure on the group's ratings."
Deutsche Post has achieved these results despite having faced a number of challenges, including (1) the ongoing decline in its mail volumes (due to the general substitution of traditional mail items with electronic communication); (2) the abolition of VAT exemption for certain mail services provided by DP (effective from 1 July 2010); and (3) deteriorating macroeconomic conditions, which have adversely affected demand for its express and logistics services (together, the DHL division), which are more cyclical in nature. In early 2009, the group decided to exit its financial activity through the sale of Deutsche Postbank AG (Postbank, rated separately A2/D+) in a three-tranche structure to Deutsche Bank (A2/C-) for a total consideration of EUR4.9 billion. Deutsche Post used the proceeds to deleverage its balance sheet and invest in restructuring its core Mail and DHL divisions.
The Postbank disposal concluded at the end of February 2012 and, as a result, approximately EUR4.3 billion of debt related to this transaction was removed from Deutsche Post's balance sheet. Deutsche Post's financial leverage -- measured as debt/EBITDA (adjusted for pension and operating leases) -- improved significantly and stood at 3.3x as at June 2012 on a last-12-months basis, compared with 4.1x as at December 2011.
As well as deleveraging following the disposal of Postbank, Deutsche Post has also achieved significant revenues and profit growth rates thanks to the solidity of its network. The group's operating profit increased to EUR2.4 billion during financial year-end (FYE) December 2011 from EUR1.8 billion and EUR231 million during FYE December 2010 and December 2009, respectively. While the revenues of the Mail division remained relatively flat over this period, its profit declined substantially following the introduction of VAT on Deutsche Post's business customers. The group had to give customers significant discounts to avoid losing their business, which led to the profit decline. Although the Mail business is likely to remain under pressure due to the secular decline in mail usage, Deutsche Post has demonstrated its ability to halt the decline in the division's profitability. The strong recovery in the profitability of the group's DHL division more than compensated for the decline in the Mail division's profitability.
The positive trend has continued in the current FYE December 2012. During the first six months to June 2012, Deutsche Post's revenues increased by 5.8% to almost EUR27.1 billion and its EBIT by 3.6% to EUR1.2 billion (this was achieved despite the Mail division's EBIT being affected by a one-off VAT payment of EUR151 million the group had to make during the semester). In addition to an EU fine of EUR298 million, which the group paid in Q2 2012, Deutsche Post will face a number of exceptional payments during the remainder of the year, which will have a negative impact on its key credit metrics: these include a VAT repayment totalling EUR515 million expected during Q3 2012. Despite these payments, Moody's would still expect Deutsche Post to achieve improvements in its metrics as at FYE December 2012 compared with those at FYE 2011.
Although macroeconomic conditions remain challenging, Moody's would expect Deutsche Post to make good progress towards its goal of generating EBIT of EUR2.6-2.7 billion during the current FYE December 2012. Success in achieving these results is likely to exert positive pressure on the rating.
Finally, given the group's 25.5% ownership by KfW Bankengruppe, Germany's largest public development bank (KfW, Aaa/Prime-1 negative), Moody's considers Deutsche Post to be a government-related issuer (GRI). Under Moody's GRI methodology, Deutsche Post's Baa1 rating benefits from a one-notch uplift and reflects the combination of the following inputs: (1) a baseline credit assessment (BCA) of baa2; (2) the Aaa rating of the German government; (3) 'low' default dependence; and (4) 'moderate' probability of support. In early September, KfW disposed of approximately 5% of its stake in Deutsche Post, which on its own is not sufficient to justify a change in the rating agency's support assumption.
The positive outlook on Deutsche Post's Baa1 rating reflects Moody's expectation that the group will (1) further succeed in improving group-wide operating performance, in terms of top-line earnings and profitability; and (2) over the next 12-18 months improve, albeit modestly, its key credit metrics, maintaining a conservative financial policy and a solid liquidity profile at all times.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's could raise Deutsche Post's BCA if the group were able to sustain the improvements in profitability it achieved during 2011, which would, in turn, enable it to maintain an EBIT margin of around 6%, a retained cash flow (RCF)/debt ratio of above 16% and debt/EBITDA below 3.5x, all on a sustainable basis. Prior to any upgrade, Moody's would also require further evidence of the group's ability to halt the decline in the profitability of its Mail division. An higher BCA will result in a rating upgrade if Moody's support assumptions built into the rating remain the same.
Conversely, Moody's could lower Deutsche Post's BCA if the company's EBIT margin (adjusted for restructuring charges) declines below 4% or if its RCF/debt ratio falls below 13% on an ongoing basis, and there is an absence of a convincing management plan to improve these ratios in the near term. A lower BCA would result in a rating downgrade if Moody's support assumptions remain the same. To this extent, despite the German government's stated intention to reduce its financial interest in Deutsche Post, Moody's current view of the probability of the group receiving government support in the event of need and the default dependence between it and the state is unlikely to change before the government takes further steps to privatise the group. However, a reduction in the support factor could also lead to a downgrade of the debt rating.
The principal methodology used in rating Deutsche Post was the Global Postal and Express Delivery Methodology, published in December 2011. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Deutsche Post, Germany's incumbent provider of mail services, is the largest postal operator in Europe in terms of revenues and also the world's largest logistics service provider with operations in more than 220 countries. Deutsche Post operates through four divisions: (1) Mail; (2) Express; (3) Global Forwarding, Freight; and (4) Supply Chain, the last three of which comprise its logistics activities grouped under the DHL brand. In the 12 months ended 30 June 2012, the company reported revenues of EUR54.3 billion, up from EUR52.8 billion reported at financial year ended 31 December 2011.
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Paolo Leschiutta VP - Senior Credit Officer Corporate Finance Group Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy Telephone:+39-02-9148-1100Eric de Bodard MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Italia S.r.l Corso di Porta Romana 68 Milan 20122 Italy Telephone:+39-02-9148-1100(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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