S&P affirms NZ Post credit rating, cuts hybrid notes to 'junk'

Standard & Poor's affirmed New Zealand Post's issuer credit and related debt rating at A+/A-1 with a long term negative outlook, while cutting its hybrid notes to 'junk' status.

NZ Post would receive a "very high level of extraordinary support" from the government in times of financial stress, but this wouldn't be extended to the $200 million of hybrid notes the national mail service has, S&P said in a statement yesterday. The Wellington-based company's hybrid notes were cut to a sub-investment grade BB+ from A-.

The state-owned mail service is grappling with the continued slide in the volume of letters posted as consumers switch to the internet, email and social media for everything from paying bills to sending birthday greetings and keeping in touch with loved ones. It embarked on a major transformation programme last year, slashing its workforce and putting greater emphasis on growing its parcels and banking business, Kiwibank, which has an S&P rating of A+ with a negative outlook.

"The core postal operations continue to face significant ongoing structural declines in traditional mail volumes, against a large and predominantly fixed cost base," S&P's credit analyst Paul Draffin said. "The negative outlook reflects 1) the weak profitability of the post operations that is highly reliant on effective cost restructuring to offset structurally declining revenue trends, and 2) rising economic imbalances in New Zealand that could affect the credit standing of NZ Post's subsidiary, Kiwibank."

S&P's rating affirmation comes after NZ Post reported a 12 percent fall in annual profit to $107 million in the 12 months ended June 30, as shrinking mail volumes were offset by gains in its Kiwibank and parcel businesses. Revenue fell 1.6 percent to $1.66 billion, with domestic letter volumes shrinking 7 percent to 642 million and forecast to drop below 500 million in the next three years. Kiwibank lifted net profit 3 percent to $100 million on fatter interest margins and lower provisioning for bad debts.

NZ Post's hybrid notes are offered through subsidiary, New Zealand Post Group Finance, and are due to be remarketed at the end of the month and reset in November. S&P said it would maintain the BB+ rating on the successful remarketing of the notes, given no changes to the terms other than the interest rate and extension of key dates for a further five years. The notes, which pay annual interest of 7.5 percent, last traded at a yield of 5.85 percent, according to NZX data.

S&P said it will lower the state-owned enterprise's rating if NZ Post's letter-delivery business experiences material losses; there is a deterioration in the competitive position or its performance in any of its key businesses; heightened economic imbalances erode the credit-standing of Kiwibank; and the ratio of funds from operations-to-debt is sustained at less than 25 percent due to persisting weak operating performance, debt-funded acquisitions or debt-funded distributions.

The ratings agency would return NZ Post to a stable outlook if uncertainties around economic risk to Kiwibank abated; profitability in the letter delivery business improved; and funds from operations-to-debt was more than 25 precent.

NZ Post acknowledged the S&P's rating in a statement, without adding further comment.

(BusinessDesk)