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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating and changed the outlook of Norwegian postal services company Posten Norge AS (Posten) to A/Negative from A+/Stable. At the same time, the senior unsecured debt rating has also been downgraded from A+ to A.

Rating rationale

The rating action reflects the company’s worse-than-expected results in 2022, largely due to unforeseen downturn in the macroeconomic environment. Post-Covid normalisation, recessionary and inflationary pressures weighed on operating and employee costs and consumer confidence. This led to a reversal of favourable conditions for e-commerce demand and profitability that had previously bolstered earnings in the prior two years during the Covid pandemic, during which Posten was well positioned to benefit from the increased demand for fast and environmentally friendly delivery solutions (especially from e-commerce), which also triggered increased capacity investments. Scope also notes the expected increase in leverage due to continued high capex that could mean a lasting decline in financial metrics prior to recovery.

Posten continues to have a strong position in Norway due to its long-standing monopoly-like position over traditional letter posting services, which supports its business risk profile. The parcel and logistics business, on the other hand, entails a higher degree of competition, but was the sole positive contributor to operating profit in 2022 and continues to grow with a positive long-term profitability trend. Posten keeps improving its competitive positioning by improving its sales channels, which comprise physical branches (primarily within supermarkets and grocery stores), self-service pick-up boxes, home delivery and digital solutions. In addition, offerings such as Shelfless (fully automated storage/warehouses) and Norgespakken establish Posten as a provider of innovative, technology-driven fulfilment and logistics solutions, able to adapt to consumer behaviour. EBITDA margins remain negatively affected by the continued and rapid loss of mail volume in Posten’s home market. Scope anticipates that EBITDA margins will remain under 10%, lower than the highs achieved in 2020 and 2021.

Posten’s financial risk profile reflects a weakening in credit metrics driven by decreasing profitability and increased debt amidst the company’s significant capex spend. In 2022, the company suffered from unexpectedly high inflation and especially increased costs particularly in energy, transport and wages, leading to a sharp increase in leverage to 3.3x at end-2022. Scope expects leverage to increase further in the short-to-medium term, which will constrain the financial risk profile for the next couple of years. Posten had initiated ambitious investment plans based on its improved financial flexibility in 2021, expectations of a continued strong performance in 2022 and its desire to maintain a strong market position in the growing and more competitive logistics landscape. However, due to the difficult macroeconomic environment since 2022, Posten is now lengthening the time horizon of previously planned investment projects. Growth investments (planned at NOK 4bn-5bn over the next three years) will largely be dedicated to increasing capacity at its terminals and will continue to constrain free operating cash flow and leverage. Scope expects Scope-adjusted leverage to exceed 3.5x in the medium term and Scope-adjusted funds from operations/debt of 20-25%. Interest cover is expected to remain low after 2022 at around 7-8x. Scope assumes that the company will not be able to fund investments with internal cash flow in the next two to three years, thus maintaining negative free operating cash flow.

Scope’s adjustment for supplementary rating drivers is related to parent support. The issuer rating reflects Posten’s standalone credit quality of BBB+ and a two-notch uplift based on Scope’s assessment of the strong capacity and willingness of Posten’s sole owner, the Norwegian state (rated AAA/Stable by Scope) to provide support, assessed following Scope’s Government Related Entities Rating Methodology. Separately, Scope continues to assume that the supportive regulatory framework, under which the Norwegian government covers the net costs of holding the universal service obligation provider licence, will remain, though full compensation costs/losses borne by Posten may not be covered without a time lag. This will likely continue as long as higher inflation adds to more net losses for the mail business. With regards to financial policy, Scope notes the company is exercising prudence in pausing dividends in 2023 after paying out an extraordinary dividend in 2022 based on 2021 performance, though dividends will most likely resume from 2024, while still in the recovery phase.

Posten’s liquidity is strong as it has good access to banks and domestic bond markets. After issuing NOK 1bn in green bonds and signing a EUR 200m revolving credit facility tied to targets for reducing greenhouse gas emissions in 2021, the company shifted to the issuance of short-term debt (certificates of deposit, short-term revolving credit facilities and revolver drawdown) in 2022 given the increased rate environment. As of YE 2022, the company had NOK 3.4bn in cash and marketable securities and NOK 2.8bn in undrawn credit lines. Liquidity is therefore sufficient to cover NOK 1.6bn in interest-bearing short-term debt.

Outlook and rating-change drivers

The Negative Outlook reflects the likelihood that deterioration in credit metrics will not be confined to one year in 2022 only, with Scope-adjusted leverage averaging 3-4x over the next few years, and free operating cash flow remaining negative due to ongoing elevated investment. Scope also assumes that Posten’s dividend payout and financial policy will not become more aggressive as the company’s performance recovers. Scope still expects that Posten will retain its leading position in the Nordic parcel market and remain Norway’s traditional mail service provider. It also assumes that the Norwegian state will remain the company’s sole owner and that there will be no significant adverse change to the regulatory framework and government procurements with the Norwegian Ministry of Transport and Communication.

A return to a Stable Outlook could occur if profitability margins and discretionary cash flow improved, resulting in Scope-adjusted leverage sustained at significantly below 3.5x. Further positive rating action is currently remote.

A downgrade could occur if the Norwegian state reduced its ownership and/or if the regulatory framework governing Posten’s role as Norway’s mandatory postal service provider changed adversely. A downgrade could also occur if overall weak market conditions persisted or worsened, or if Posten’s financial policy changed significantly, leading to Scope-adjusted leverage over 3.5x on a sustained basis.

Long-term and short-term debt ratings

The senior unsecured debt rating is in line with the issuer rating. Posten is also the bond-issuing entity. Posten has a private placement and outstanding bonds totalling NOK 1.3bn, maturing in 2023 and 2026, as well as a NOK 222m Nordic Investment Bank loan with repayments in 2023 and 2024.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Government Related Entities Rating Methodology, 6 May 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Tiffany Ng, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 26 March 2021. The Credit Ratings/Outlooks were last updated on 1 March 2022.

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
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