ACRA affirms AAA(RU) to Russian Post, outlook Stable, and AAA(RU) to bonds

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 medium liquidity, moderate cash flow, and low interest coverage.

The Company is the operator of the Russian government postal network, 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 and delivery of pension payments, utility payments, and it acts as a consumer goods supplier in remote settlements. The Company's 2018 revenue under RAS may exceed RUB 190 billion, while the most beneficial delivery business has grown up to 433.3 million parcels against 365 million parcels in 2017. The Company owns 42,000 post offices, 85 branches, 51 sorting centers, about 16,000 motor vehicles, over 800 postal railway cars, and two airliners. The Company employs more than 300 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, ensuring the country's unity, extending the communications space across Russia, and providing low-margin services in remote regions and settlements. A substantial amount of pension contributions (13.5 million retirees) 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. Previously, the Company received state 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. In 2018 and 2019,
the Company received grants from Moscow government for capital repairs of its Moscow-based post offices. The Company is on the list of strategic enterprises of the country, therefore, in accordance with Art. 191 of Federal Law No. 127 "On Insolvency (Bankruptcy)", the state shall prevent any bankruptcy events with respect to the Company, including by issuing government guarantees. In 2017, the authorized fund 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 score for the infrastructure ownership model, as almost all post offices, motor vehicles, air and railway transportation means are under operating control of the Company; 3) high score for services diversification, as the revenue is stable in the deliveries segment and grows steadily in the trade segment. The score for geographical diversification is very high, as the Company operates throughout the country and sends mailings to 150 million addresses, including individuals and corporates outside the Russian Federation.

Medium leverage and moderate 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 2016 to 2021. At the same time, the quality assessment of the Company's leverage is high due to the comfortable debt maturities. Interest rates offered under new bond issues are comfortable for the Company, which allows it to refinance securities issued in 2012–2016. The Company's investment program for 2019–2021 would require a relative increase in the leverage. Those factors taken together result in the coverage of 2.3x, which is assessed as moderate.

Medium liquidity. A high enough volume of committed credit lines is available to the Company, but the liquidity portfolio mostly includes bond loans. A qualitative assessment of liquidity is high due to a comfortable debt repayment schedule in the medium term and the access to funding from large state-owned banks.

Cash flow is 'moderate' due to significant capital investments: in 2019–2021, the Company may spend more than RUB 100 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 1% in 2018 down to -18% in 2019 due to peak investment expenses expected this year, but the FCF margin is expected to return to 2–3% in 2020-2021. The capital expenditures to revenue ratio is expected to grow from 4% in 2018 to 23% in 2019, and then it may return to 5–6% in 2020–2021.

Key assumptions

  • Revenues, as adjusted by the growth rate of retail goods turnover estimated by ACRA, 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 in 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 the RF.

Issue ratings

Bond loan, Certified exchange-traded interest-bearing non-convertible unregistered bond issued by Russian Post, subject to mandatory centralized storage BO-001R-04 series (RU000A0ZZ5H3); maturity date: February 24, 2028, issue volume: RUB 5 bln — ААА(RU).

Bond loan, Certified exchange-traded interest-bearing non-convertible unregistered bond issued by Russian Post, subject to mandatory centralized storage BO-001R-05 series (RU000A0ZZ5J9); maturity date: April 24, 2028, issue volume: RUB 5 bln — ААА(RU).

Bond loan, Certified exchange-traded interest-bearing non-convertible unregistered bond issued by Russian Post, subject to mandatory centralized storage, BО-001R-07 series, ISIN RU000A1008Y3); maturity date: March 27, 2029, issue volume: RUB 5 bln — АAА(RU).

Credit rating rationale. The issue represents senior unsecured debt of Russian Post. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to the ACRA methodology, and taking into account high creditworthiness as well as the absence of any substantial secured debt obligations, the Agency applies a simplified approach, under which the credit rating of the issue is equivalent to that of the Company, i.e. AAA(RU).

Regulatory disclosure

The credit ratings assigned to Russian Post and bonds (RU000A0ZZ5H3, RU000A0ZZ5J9, RU000A1008Y3) issued by Russian Post were 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. In the process of credit rating assignment to the above issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

For the first time, the credit rating assigned to Russian Post was published on April 24, 2018, the credit ratings assigned to bonds (RU000A0ZZ5H3, RU000A0ZZ5J9) were published on June 04, 2018, and the credit rating assigned to bond (RU000A1008Y3) was published on April 10, 2019. The credit rating assigned to Russian Post and its outlook as well as the credit ratings assigned to bonds (RU000A0ZZ5H3, RU000A0ZZ5J9, RU000A1008Y3) issued by Russian Post are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are based on the data provided by Russian Post, information from publicly available sources as well as 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 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.

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