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Global Credit Research - 13 May 2010
Milan, May 13, 2010 -- Moody's Investors Service has today changed the outlook to negative from
stable on the Aaa.sk National Scale Rating (NSR) of Slovenska Posta
(SP) following the ongoing deterioration in the company's operating
performance due to market conditions and liquidity profile over recent
years. The Aaa.sk NSR remains unchanged.
Moody's decision to change the outlook to negative reflects the
fact that any deterioration in the company's baseline credit assessment
or in Moody's perception of the current support provided by the
government, currently built into the rating, might result
in a rating downgrade of the company's NSR. In Moody's
view the baseline credit assessment of the company is under pressure due
to the ongoing deterioration in the company's EBIT margins (as measured
by Moody's) due to declining volumes in its mail division as a consequence
of the economic crisis, increasing competition and e-substitution,
as well as rising operating costs (mainly labour costs). Furthermore,
following reduction in cash balances to finance the recent investment
plan, Moody's notes that the company's liquidity profile
has deteriorated and might be now more reliant on core banks availability
to renew the existing short term credit lines.
Moody's notes that pressure on SP's rating is likely to decline
as a result of the recent tariff increases that were passed in mid-2009,
the company's efforts to reduce costs and launch new products,
and the fact that capital expenditure is expected to decline from the
peak of 2008 and 2009. Nevertheless, the rating agency says
that, at this stage, evidence of a positive improvement in
operating margins is limited. The Aaa.sk NSR of the group
reflects Moody's application of its methodology for Government-Related
Issuers (GRIs), reflecting the fact that SP was established by Special
Law and is currently 100% owned by the Slovak government (specifically
by the Ministry of Transport, Post and Telecommunications).
The rating incorporates both an assessment of the company's credit strength
as well as an expectation of government support in the event that an extraordinary
bailout is needed.
Moody's believes that the likelihood that the Slovak government will support
SP is likely to remain high, based on: (i) the full state
ownership of SP; (ii) the strategic national importance of a functioning,
nationwide postal service of a certain level of quality; and (iii)
the high costs in reputation, economic and social terms, in
the event of SP's default, as SP is one of the country's largest
employers. At the same time, Moody's believes that there
is a high correlation of credit risk between the support provider (the
Slovak government) and SP given the dominance of domestic revenues for
Moody's assessment of SP's credit strength on a standalone
basis reflects the modest size of the company, the ongoing liberalisation
of the postal market, the overall declining nature of postal services
and the weak operating profitability during 2009 and concerns over the
evolution of the company's liquidity profile. Despite a modest
deterioration in the company's key credit metrics, SP's
financial leverage (measured as debt to EBITDA), which stood at
1.5x as at FYE December 2009, and cash flow coverage metrics
(with RCF to Debt at 62% at FYE 2009) remain supportive of the
rating. The company has maintained a relatively high level of capex
during 2008 and 2009 so as to (1) upgrade its facilities, (2) prepare
for the liberalisation of postal markets in 2013 and (3) facilitate a
smooth conversion from the Slovak koruna to the euro as of January 2009.
Given SP's deteriorating operating profile, internally generated
cash sources were insufficient to fund these extraordinary investments
(EUR75 million in 2008 and EUR52 million in 2009), and this resulted
in negative free cash flow. These needs were financed partially
through cash available on balance sheet but also through increased debt
Going forward, in order to keep the existing Aaa.sk NSR,
the company will have to demonstrate its success in improving operating
margins, in generating positive free cash flow and in maintaining
an adequate liquidity profile. Moody's recognises that the
tariff increase approved by the Postal Regulatory Office during 2009 should
help the company to cover part of the additional costs and compensate
for the declining volumes. In addition, capital expenditure
is also expected to be limited and the rating agency acknowledges the
company's decision to reduce dividend payments in order to preserve
cash. A deterioration in Moody's perception of SP's
credit assessment on a standalone basis would result in a rating downgrade.
Downward pressure on the rating could also arise from a reduction in the
support provided by the Government which is currently built into Moody's
The previous rating action on SP was implemented on 30 April 2009,
when Moody's affirmed the company's Aaa.sk long-term
national scale rating.
The principal methodology used in rating Slovenska Posta was the Rating
Methodology for Postal and Express Delivery Companies, published
in December 2008, which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating SP can also be found in the Rating
Methodologies sub-directory on Moody's website.
SP is the country's leading postal service operator with a monopoly on
letters weighing less than 50 grams, mail deliveries, as well
as express courier, parcel and logistics services in Slovakia.
The company has a Universal Service Obligation (USO) to provide comprehensive
postal services until the end of 2012. It operates a branch network
of nearly 1,600 post offices and is one of the largest employers
in Slovakia with almost 15,000 employees. Act No.394/2004
set up the transition of ownership rights of this state enterprise to
a joint-stock company and the Act also incorporated the definition
of "Priority Properties" reflecting the minimum required size of the company's
assets, thereby ensuring the required standards of SP's Universal
Services Obligation. These properties have not been subject to
any pledge and they must remain in the company's ownership.
NATIONAL SCALE RATINGS
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs for the Slovak Republic are designated by the ".sk" suffix.
NSRs differ from global scale ratings in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
Paloma San Valentin
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's changes outlook on Slovenska Posta Aaa.sk NSR to negative
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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