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Rating action

Scope Ratings GmbH (Scope) has assigned an issuer rating of A+/Stable to Norwegian postal services company Posten Norge AS (Posten). At the same time, Scope has assigned a senior unsecured debt rating of A+.

Rating rationale

The issuer rating reflects Posten’s standalone credit quality of A- and a two-notch uplift based on Scope’s assessment of the high capacity and willingness of Posten’s sole owner, the Norwegian State (AAA/Stable by Scope Ratings), to provide support, assessed in accordance with Scope’s Government Related Entities Methodology.

With regard to Posten’s business risk profile, Scope notes positively the company’s strong position in Norway due to its long-held monopoly-like position over traditional letter posting services. The group is a universal service provider fulfilling a universal service obligation in Norway. The traditional letter posting industry, however, is undergoing a clear structural decline. Even so, the risks to Posten are more limited, as government procurement grants cover all net costs the company incurs for its non-commercially viable obligations under the Postal Services Act. The parcel business, on the other hand is seeing higher competition, but is growing significantly, with profitability rising, helped by the intensified structural changes post the covid-19 pandemic.

Geographical diversification is adequate for a postal services company, with operations across the Nordic region, although the company relies heavily on its home market of Norway, which accounts for about two-thirds of its revenues. Diversification is further influenced by Posten’s continued effort to improve its various sales channels, with physical branches (primarily within supermarkets and grocery stores), self-service pick-up boxes, home delivery and digital solutions. Its customer base is truly diverse, ranging from large clients such as government bodies and corporates to individual retail clients across the Nordic region. A less tangible business risk for Posten is the political risk related to the future regulatory framework and government procurements to be implemented in its mail business.

Posten’s financial risk profile is supported by strong credit metrics that followed the record high operating result during 2020. Although this could be partially ascribed to the one-off effect from pandemic lockdowns, Scope considers the upward parcel trend to be more permanent, with group EBITDA margins to average above 10% in the medium term. Under Scope’s base case, mail volume is not expected to recover, resulting in a yearly double-digit percentage decline for this segment going forward, whereas the logistics business (parcels in particular) is expected to have single-digit growth rates in the medium term. The overall improvement in profitability will help to keep a more conservative capital structure as well.

With respect to future investments, Scope anticipates capex ambitions to increase, based on the company’s improved financial flexibility and aim to withstand the increased competition in logistics. Given these assumptions, Scope expects solid Scope-adjusted leverage (Scope-adjusted debt to EBITDA) of around 1.0x-1.5x in the medium term and a funds from operations/Scope-adjusted debt ratio of well above the 45% guideline for the A category rating. Interest cover is also expected to be strong, although free cash flow cover is expected to be more volatile.

Scope’s only adjustment for supplementary rating drivers is for parent support. Still, the agency recognises Posten’s conservative financial policy, aimed at high financial flexibility and low financing costs. Scope also notes that the Norwegian state has set the dividend ambition at 50% of the group’s profit (after tax). Even so, any payout shall not put Posten in financial jeopardy and is therefore determined with reference to equity and liquidity targets and is seen as prudent by Scope.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Posten will continue to hold a leading position in the Nordic parcel market and remain Norway’s traditional mail service provider. The Outlook also assumes that the Norwegian state will remain the company’s sole owner, as well as no significant adverse change to the regulatory framework and government procurement agreements with the Norwegian Ministry of Transport and Communication. Financially, Scope expects free operating cash flow to fluctuate somewhat due to increased investment ambitions, but with Scope-adjusted leverage averaging in the lower range of 1-2x area.

A positive rating action is possible if profitability margins and discretionary cash flow improve, resulting in a Scope-adjusted leverage sustained at well below 1x.

A negative rating action is possible if the Norwegian state reduces its ownership and/or if the regulatory framework governing Posten’s role as Norway’s mandatory postal service provider changes adversely. A downgrade is also possible if overall market conditions weaken, leading to negative credit ratio effects exemplified by a Scope-adjusted leverage moving towards 2x (or higher) on a sustained basis.

Long-term and short-term debt ratings

The senior unsecured debt rating is in line with the issuer rating. Posten Norge AS is also the bond-issuing entity. Posten has two outstanding NOK bonds totaling NOK 1.35bn, maturing in 2021 and 2022.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Government Related Entities, 6 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK endorsed.
Lead analyst Henrik Blymke, Managing Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 March 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.