OREANDA-NEWS. November 30, 2015. 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 business profile, internet-driven volume growth in DP's parcels business, fairly stable credit metrics for the current rating and adequate financial flexibility. This is offset by ongoing margin pressure and structural pressures on traditional volumes, an uncertain economic outlook and volatility in the three DHL divisions: Express, Global Forwarding, Freight (GFF) and Supply Chain.

KEY RATING DRIVERS
Balanced Risk Profile
The ratings reflect DP's 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 (DHL) and growth in internet-led domestic parcel volumes. This is offset by the more cyclical and competitive nature of express services, GFF and supply chain operations.

DHL Volumes More Volatile
DP, through its subsidiary DHL, 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 volumes in both the Express division and supply chain operations. DHL 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. For 9M15, DP's parcels and international express volumes and revenues grew by over 8% yoy.

Supply Chain Improvements
GFF and supply chain performance are directly correlated to general global trade volumes, although we expect supply chain operations to remain more vulnerable to changes in manufacturing output.

Fitch expects volume drivers to remain the same in 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. More stable euro exchange rates may result in more predictable, albeit still low, margins.

Parcels Offset Declining Mail
Traditional mail volumes and revenues are declining due to 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 of mail services in Germany. E-commerce volume growth in Germany of 9% for 3Q15 YTD, driven by parcel growth due to the growth in online shopping, is in line with DP's expectations. Overcapacity in some markets remains a threat to both volumes and margins, albeit offset by DP's global network.

Stabilising Financial Profile
Fitch expects DP's financial profile to be broadly stable in 2016, reflecting a conservative funding strategy and expected margin improvement. Fitch forecasts free cash flow (FCF) to be moderately negative after assumed average capex of EUR2.3bn per year until 2017 and a 50% dividend pay-out. Fitch estimates FFO (funds from operations) lease adjusted net leverage for 2015 to be 2.8x, little changed from 2.7x at end-2014, reflecting our forecast of stable FFO for the full year and a small increase in debt. We expect fixed charge coverage, including non-cancellable operating leases averaging EUR1.9bn per year, to stay close to 2.5x for 2015.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- continued decline in mail volumes partially offset by growth at the parcels business
- gradually improving profitability driven by growth in the Express division
- liquidity to remain adequate due to an undrawn EUR2bn facility, moderately negative FCF and limited debt repayments
- dividend payments in line with the company's policy of 40%-60% payout ratio
- Blended operating lease adjustment multiple of 5.5x, reflecting the large proportion of payments relating to office, IT, vehicles and building leases co-terminating with contracts.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, 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 cashflow contribution from the domestic parcel business to compensate declining traditional mail profits supporting FCF generation.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-FFO lease adjusted net leverage above 3.5x on a sustained basis and weakening of FFO fixed charges coverage; significant deterioration in business fundamentals due to a protracted economic downturn or structural changes leading to significant volume and margins reduction in the DHL divisions and consistently negative FCF.

LIQUIDITY
Liquidity at DP was adequate at end-September 2015 through a combination of strong cash balance, an undrawn credit facility and moderately negative FCF generation expected for 2015-2016. On balance sheet cash at end-September 2015 was EUR2,073m (of which c.EUR1bn was considered as restricted), down from EUR2,978m at end-2014. DP maintains a committed undrawn EUR2bn credit facility maturing in 2020.