OREANDA-NEWS. Fitch Ratings has affirmed Deutsche Post AG's (DP) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+' and Short-term IDR at 'F2'. The Outlook on the Long-term IDR is Stable. Deutsche Post Finance B.V.'s senior unsecured rating has also been affirmed at 'BBB+'.

The affirmation reflects DP's balanced risk profile and solid operating performances, as well as the modest improvement in credit metrics to remain in line with guidance for the rating. The company maintains financial flexibility to cope with structural pressures, uncertain economic outlook and volatility in the DHL segment.

KEY RATING DRIVERS
Balanced Risk Profile
DP's ratings reflect its balanced business risk profile, supported by the stable contribution of its core mail products despite structural volume declines, its strong position in global time-definite express services and growth in internet-led domestic parcel volumes. This is offset by the more cyclical and competitive nature of the three DHL divisions (Express; Global Forwarding, Freight; and Supply Chain).

Express and Freight Volumes More Volatile
Through its ownership of DHL, DP has a dominant position in time-definite deliveries, underpinned by an extensive and strongly branded global logistics network. A broad range of contracts with major industrial, retail and government clients underpins revenues in both Express and supply chain operations. Express and freight volumes are highly correlated to GDP dynamics, and often at a multiple of GDP movement, which can result in sharp downturns in volume. Intra-modal transport competition (air to ocean) can exacerbate volatility. In the first nine months of 2014, DP's parcels and international express volumes and revenues grew by about 7% yoy.

Supply Chain Improvements
GFF and supply chain volumes improved during 2014, reflecting general global trade volumes, although supply chain operations were slightly impacted by weak economic output up to September 2014. Fitch expects volume and revenue drivers to remain comparable in 2015 and 2016, although a slowdown in international growth could lead to flat or falling revenues. Fitch expects high renewal rates and new supply chain contracts to result in cash flow growth. A weakening euro may also have a positive cash effect in 2015.

Parcels Offset Declining Mail
Traditional mail volumes and revenues are in decline globally in the face of higher email usage, despite a rise in regulated mail prices. These are offset by a rising contribution from domestic parcels, albeit with lower profit margins. Volume falls are lower for DP than its peers due to lower initial penetration. E-commerce volume growth in Germany is close to company forecasts at about 7% for 3Q14, and reflects parcel growth due to the growth in online shopping. Overcapacity in some markets remains a threat to both volumes and margins.

Adequate Financial Profile
DP maintains healthy financial flexibility. Fitch expects DP's financial profile to improve slightly in 2015 and 2016, reflecting a conservative funding strategy and expected margin improvement. Fitch forecasts positive free cash flow after average capex of EUR1.85bn per year until 2016 and a 50% dividend pay-out. Fitch expects funds from operations (FFO) adjusted net leverage for YE14 to improve from 3.6x at YE13, reflecting Fitch's forecast of a rise in FFO for the full year to December 2014. We expect fixed charge coverage including non-cancellable operating leases averaging EUR1.7bn per year to improve closer to 3.0x, which is tight for the rating.

LIQUIDITY
DP's liquidity was adequate at the end of September 2014, reflecting a combination of strong cash balances, an undrawn credit facility and positive free cash flow generation. Reported cash at the end of September 2014 was EUR2.14bn (of which around EUR1bn was considered as restricted) down from EUR3.4bn at the end of 2013 due to repayment of EUR1bn bond at the beginning of 2014. DP maintains an undrawn EUR2bn credit facility maturing in 2019 which was recently extended. Under Fitch's rating case forecast, DP is expected to generate around EUR500m of free cash flow in 2014.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
FFO lease adjusted net leverage below 2.5x and FFO fixed charge coverage above 3.5x on a sustained basis; an improving macro-economic outlook supporting performances of DHL's divisions; and continued increase in cash flow contribution from the domestic parcel business to compensate declining traditional mail profits supporting free cash flow generation.

Negative: Future developments that could lead to negative rating action include:
FFO lease adjusted net leverage above 3.5x on a sustained basis and weakening of FFO fixed charge coverage; significant deterioration in business fundamentals due to a protracted economic downturn or structural changes leading to significant volume and margin reduction in the DHL divisions, and consistently negative free cash flows.