December 15, 2017 / 3:21 PM / a month ago

Fitch Affirms FSUE Post of Russia at 'BBB-'; Outlook Positive

(The following statement was released by the rating agency) MOSCOW, December 15 (Fitch) Fitch Ratings has affirmed FSUE Post of Russia's (PR) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', and Short-Term Foreign Currency IDR at 'F3'. The Outlooks are Positive. PR's senior unsecured debt ratings have been also affirmed at 'BBB-'. Fitch classifies PR as a credit-linked entity to the Russian Federation (BBB-/Positive), and equalises its ratings with the sovereign's. This is supported by 100% state ownership, close oversight by the government, PR's special legal status, high strategic importance and, to a lesser extent, integration with the Russian budgetary system. Close ties with the state are a key rating factor, which in Fitch's view imply a high likelihood of support, if needed. KEY RATING DRIVERS Legal Status Assessed as Stronger PR is a national postal operator of regulated and non-regulated services. It has a legal status of federal state unitary enterprise (FSUE), implying strong links with the Russian Federation. In addition PR is included in various lists of government-related entities with crucial social functions. This legal setting imposes strict limitations on the company. Any significant change to PR's legal structure requires a presidential decree or a special law. Finally, PR has the status of a natural monopoly, ie. it is a subject to state regulation and monitoring. Fitch expects PR to be converted to public company with 100% state ownership in 2018-2019. The agency views this change as a necessary step in attaining greater operational efficiency without affecting its strong ties with the state, as we do not foresee a decrease of state ownership over the medium term. A decrease of the government's stake in PR below control could be considered rating-negative, implying reduced importance to and, therefore, weaker links with the state. Strategic Importance Assessed as Stronger PR provides key public services such as universal postal services and money transfer through its extensive post office network. With its approximately 42,000 post offices across the country, PR is often the only state-related entity permanently present in the remote areas of Russia. It performs the highly important function of connectivity for Russia's vast territories by providing access to mail and printed media. It also delivers 30%-40% of social benefits to the elderly (mainly state pensions), a significant number of whom are socially vulnerable people. The company also employs over 300,000 staff, making it one of the largest employers in Russia. Control Assessed as Stronger The state exercises complete control over PR's activities, including approval of strategies, appointment of CEO and audit of operations. The company's budget, borrowings and all material transactions above RUB5 million (about USD90,000) must be authorised by the Ministry of Communications of Russia. Apart from being listed as a natural monopoly, PR has the status of a strategically important entity; therefore its operations, asset disposal and M&A activity are subject to strict government control. Integration Assessed as Mid-range Fitch views PR's integration with the general government sector as moderate. PR's accounts are not consolidated in the government's budget and the company's debt is not consolidated into state debt. Since 2015 PR did not receive any significant subsidies for loss-making services. These activities are cross-subsidised by the profitable segments of PR's business. However, there is a track record of indirect state support of the company. In recent years the governmental bodies approved above-inflation tariff indexation for PR's regulated services: 9.7% average tariff growth in 2016 and 13.5% in 2017, which is well above the CPI of 5.4% and 3.5% (Fitch forecast), correspondingly. In Fitch's view, this represents a form of unappropriated quasi-subsidy of RUB3 billion in 2017 in the regulated segment. This allowance funds PR's social function and provides additional financing for the company's modernisation programme. PR's integration with the state is also enabled through strong financial flows between both entities, and roughly 30% of PR's revenue comes from the public sector. PR distributes social benefits payments, i.e. around 33% of pensions to 14.5 million people are delivered via PR's network. Accordingly PR regularly receives transfers from Pension Fund of Russia and compensation for the service, which constitutes 20% of its revenue. PR also provides services to governmental bodies (11% of PR's revenue), e.g. Federal Tax Service, Ministry of Defence, traffic police, etc. PR also receives around 20% of its funding from quasi-state sources. For example, VEB (state development bank) bought PR's long-term infrastructure bonds (RUB3 billion in December 2015), and in June 2016 Far East Development Fund was mandated by the government to provide RUB1.8 billion for PR's logistics centre construction. State-owned Svyaz Bank provided 12% of PR's funding as of 30 September 2017. Performance Improved According to Russian standard accounts, PR's total revenue grew 10.7% in 2016, following a 6.1% increase in 2015. This was led by parcel delivery (up 36.1% yoy) as earlier infrastructure investments and new delivery services allowed PR to capitalise on the growing popularity of online shopping in Russia. Other positive contributor to revenue growth was retail trade (up 13.9% yoy). Revenue from written correspondence reversed its declining trend of the last years as it grew 5.3% yoy on tariff indexation. Debt and Liquidity Fitch expects an increase in PR's debt to RUB56 billion by end-2018 as at least half of the capex on modernisation will be funded by debt. PR's debt is sound and dominated by long- term domestic bonds, which constitute 80% of the company's total outstanding debt. During 9M17 PR's debt increased to RUB47.8 billion from RUB34 billion. This was driven by the issue of RUB15 billion 10-year bonds. As of November 2017 PR's refinancing needs for 2018 were manageable at RUB5.4 billion (11% of outstanding debt). PR's liquidity buffer as of 30 September 2017 was sound, with cash and cash equivalents of RUB16.9 billion, which fully covers debt due in 2017-2020. Cash holdings are mostly deposited in state-owned banks. Future funding is comfortable, underpinned by RUB13 billion of available committed credit lines and an undrawn limit of RUB44 billion on the company's bond issuance programme. This mitigates immediate and medium- term refinancing risks. RATING SENSITIVITIES Changes to PR's ratings and Outlook are likely to mirror the Russian sovereign's. Weaker links with the state, as reflected in a change of legal status leading to material reduction of the state's participation in the company, or a lack of financial support in case of significant deterioration in PR's financial sustainability would be negative for the ratings. Fitch published an exposure draft "Government-Related Entities Rating Criteria" on 27 November, which would apply to FSUE Post of Russia if adopted as criteria. Further details can be obtained from the exposure draft. Fitch will be accepting market feedback until 5 January 2018 at criteria.feedback@fitchratings.com Contact: Primary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 2405 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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