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Rating Action:

Moody's downgrades TNT to Baa1; negative outlook

03 Dec 2010

Approximately USD1.60 billion worth of rated debt affected

Milan, December 03, 2010 -- Moody's Investors Service has today downgraded to Baa1 from A3 TNT NV's issuer rating and the senior unsecured rating on the company's USD1.60 billion worth of notes due in 2017 and 2018. The short-term rating of P-2 on the commercial paper programme issued by TNT Finance B.V. remains unchanged. The outlook on the ratings is negative.

RATINGS RATIONALE

"The ratings downgrade to Baa1 from A3 reflects TNT's announcement on 2 December 2010 that it intends to demerge its Express operations from TNT NV and its Mail operations -- a move that Moody's believes would lead to a deterioration of the company's business profile," says Paolo Leschiutta, a Moody's Vice President-Senior Analyst and lead analyst for TNT. The rating agency explains that this is because TNT will have to rely more on its mature postal business, which is facing increasing challenges to maintain volumes as a result of the liberalisation of postal markets across Europe and increasing substitution with electronic communication. The negative outlook reflects Moody's view that the rating will be weakly positioned over the short to medium term whilst awaiting for financial deleveraging contingent on market conditions and the company's ability to dispose of this retained stake in the Express activity. Moody's recognises the current valuation of this remaining stake could be sufficient to reduce the company's debt in line with guidance metrics mentioned below, but this remains subject to potential delays and volatility in market prices.

"Nonetheless, the Baa1 ratings also reflect Moody's expectation that TNT will retain its leadership position in the Dutch mail segment and a conservative financial policy, in line with the company's stated intention to preserve a Baa1 rating," continues Mr Leschiutta. In addition, the ratings reflect (i) the ongoing restructuring of TNT's Mail business, with the company trying to reduce costs in the face of lower demand for its services; and (ii) Moody's expectation that cash flow generation from the business will satisfactorily improve over the medium term (although exceptional restructuring cash outflows will affect it over the short term).

Moody's understands that TNT intends to float 70% of its Express business, retaining a 29.9% of it as an equity investment. The company will initially retain all of the existing group debt on its balance sheet and the rating reflects Moody's expectation that this will be reduced over time. The rating assumes that, over the medium term, TNT will achieve, and maintain thereafter, (i) financial leverage, measured as debt/EBITDA, below 2x; and (ii) a retained cash flow (RCF)/debt ratio of around 20%. In this context, Moody's recognises the relatively healthy operating margins of TNT's Mail operations (compared with the company's historical levels of profitability). However, over the short term, TNT's cash flow generation is likely to be negatively impacted by restructuring measures taken by the company to improve efficiency (in line with its Master Plan programme).

Although the proposed demerger remains exposed to a degree of execution risk, today's downgrade also reflects TNT's weak operating performance so far in 2010. The company's reported EBIT for the first nine months of the year declined by 16.8% to EUR449 million, despite an increase in revenues of 7.5% compared with the same period of 2009. Although TNT's Express business recovered from its weak position in 2009, the Mail business suffered significantly, with a fall in reported EBIT of 44.6% for the period. On an underlying basis, excluding the impact of exchange rates and one-off and restructuring costs, EBIT for the Mail business fell by 6% for the first nine months of 2010. Therefore, TNT would be challenged to maintain adequate credit metrics for the A3 rating category even without the proposed demerger.

The rating also assumes a successful completion of the demerger and that the company will maintain a satisfactory liquidity profile at all times and specifically enough availability under sizeable committed multiyear credit facilities to cover short term cash needs like debt repayments, dividends and capital expenditure. The rating is also predicated on the rating agency's expectation that the company will prioritise debt reduction over potential returns to shareholders.

Moody's could consider further downgrading TNT's ratings if the company were to fail to (i) reduce its financial leverage towards 2x over the next 12-18 months; and/or (ii) prevent its RCF/debt ratio from deteriorating towards the mid-teens. The rating could also be downgraded if TNT's free cash flow, as calculated by Moody's (i.e. after dividend payments), were negative for more than two years or if the profitability of its Mail division reduced below 10% (excluding restructuring costs) at any time.

Upward pressure on the ratings is unlikely over the medium term. However, over the longer term, Moody's could consider upgrading TNT's ratings if the company were to: (i) reduce its financial leverage towards 1.5x; (ii) strengthen its RCF/debt ratio towards 25%; and (iii) exhibit a proven track record of generating positive free cash flow.

Ratings affected today are:

Downgrades:

..Issuer: TNT NV

....Issuer Rating, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond, Downgraded to Baa1 from A3

Moody's previous rating action on TNT was implemented on 7 June 2010, when the rating agency affirmed the company's A3 ratings but maintained the negative outlook. This unchanged outlook reflected the business and financial implications of TNT's exploration of the best long-term alternatives for its Mail business.

The principal methodology used in this rating was the "Global Postal and Express Delivery Companies" rating methodology, published in December 2008.

Based in the Netherlands, TNT N.V. is a global provider of mail and express services. The company operates in more than 200 countries under two brands: Royal TNT Post (Mail) and TNT (Express). As at FYE December 2009, TNT reported revenues of EUR10.4 billion (down 6.7% year-on-year), and an underlying operating profit of EUR896 million (down 21.5% year-on-year).

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Milan
Paolo Leschiutta
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's Italia S.r.l
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Italy

Moody's downgrades TNT to Baa1; negative outlook
No Related Data.
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