NZ Post part-sale of Kiwibank keeps its credit rating safe, but bank's could be cut

New Zealand Post Group's proposal to sell a 45% stake in Kiwibank to the NZ Superannuation Fund and Accident Compensation Corp will have no immediate impact on the troubled state-owned enterprise's credit rating but could see the bank's rating cut one notch.

NZ Post expects to reap $495 million for its stake if the sale goes ahead with NZ Super Fund taking 25% and ACC 20% in a deal valuing the bank at $1 billion. NZ Post is losing as much as $30 million a year from its declining mail business and recently confirmed it will cut another 500 staff.

Standard & Poor's said if the transaction is finalised by the end of June, it expects NZ Post to retain sufficient sale proceeds to sustain a minimal financial risk profile, in line with its expectations of an A+ rating.

That's provided debt to ebitda is sustained at less than 1.5 times under a range of operating scenarios, and a strong balance sheet remains critical to offset revenue pressure on the company's core mail business, it said.

The sale proceeds won't generate any extra capital for Kiwibank and will mainly be used to pay down NZ Post debt with an unspecific amount going to the government by way of a special dividend.

NZ Post chairman Michael Cullen said the NZ Post board believed securing an agreement with the two Crown entities would significantly benefit Kiwibank long-term.

"The sovereign-status NZ Super Fund and ACC are proven public sector investors," he said. "Their long-term investment horizons, expertise and access to capital would complement New Zealand Post as a shareholder and support the ongoing development of Kiwibank."

But S&P has indicated that Kiwibank's A+ long-term rating will be placed on credit watch negative pending the proposed end of the standing guarantee NZ Post has to fund the bank's payment obligations. Should the guarantee be cancelled as expected, S&P has indicated it will result in a one-notch downgrade of Kiwibank's rating to A.

Kiwibank isn't commenting on the proposed sale, other than to say it views the move positively.

To get Kiwibank's capital to a level comparable to ANZ New Zealand would require an injection of another $563 million, which is more than the SuperFund and ACC are paying for their holding, said interest.co.nz owner David Chaston.

To match the earnings of the Australian banks on that beefed up capital, Kiwibank's annual tax paid earnings would need to rise to $230 million from $127 million, he said.

"Kiwibank needs to double its profits while it doubles its capital to benchmark like other major NZ banks - assuming it does the same level of business it did in 2015. If it wants to grow, it will need these benchmarks higher."

NZ Post has put $400 million into Kiwibank since it was set up 14 years ago but that money has been funded by debt and it has said it can't afford to provide further capital.

Kiwibank paid $21.6 million in 2015 and $24 million in the 2016 year to date in dividends to NZ Post.

Massey University banking commentator David Tripe said there were still a number of uncertainties over the proposed deal including whether the new shareholders would require a higher dividend than that paid to NZ Post and how much capital they'd be prepared to put into the bank.

He said the two Crown-associated entities are getting their stakes at a good price - at book rather than market value. "There's some inter-government shenanigans," he said.

Any shares put up by NZ Super or ACC would have to be offered back to the Crown and can't be on-sold to anyone else within the next five years.

While the government says its committed to Kiwibank remaining in public ownership, NZ Post's 55% stake could get further diluted if the other two shareholders provide capital investment over time and it doesn't participate.

The NZ Super Fund said a final decision to invest has not been made and remains subject to a number of conditions including satisfactory due diligence, NZ Post Board approvals and Reserve Bank approval.

"That said, this is a rare opportunity to purchase a significant minority stake in a large, unlisted New Zealand company. NZSF and ACC both believe we can add value to Kiwibank through our access to capital and active approach to investment management," a fund spokesman said.

The SuperFund and ACC's long investment horizon are also a good fit with Kiwibank, they said.

ACC declined to add further comment.

The sale is worrying for workers in the wider NZ Post Group and the country as a whole, said Joe Gallagher, industry organiser for E tu, the union representing NZ Post and Kiwibank workers.

"Kiwibank is the jewel in the crown of the NZ Post Group," he said. "There seems to be no benefit in this sale except moving money around so the government can claim to be in surplus again."

At the least it deprives NZ Post of the support it needs to provide stable jobs for kiwis and at worst, looks like the government is preparing NZ Post for sale - and not into public hands, Mr Gallagher said.

ACT leader David Seymour called the proposal an "odd in-house partial privatisation" that was "just reshuffling deck chairs.

"The New Zealand taxpayer will still bear all the risks of investing in a bank," he said.

"It would have been braver and better to sell part or all of Kiwibank to private owners, following the successful mixed-ownership model applied to Mighty River Power, Meridian, and Genesis."

Labour's SOE spokesperson David Parker said National has ignored Kiwibank's need to expand and Sir Michael should be "congratulated for securing a route to expand KiwiBank and keep it in public ownership, given the refusal of National to provide more capital for NZ Post or KiwiBank."

(BusinessDesk)