OREANDA-NEWS. December 23, 2015. Fitch Ratings has affirmed FSUE Post of Russia's (PR) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AAA(rus)'. The Outlooks on the Long-term IDRs are Negative and the Outlook on the National Long-term rating is Stable.

Fitch has also affirmed PR's senior debt ratings at 'BBB-'/'AAA(rus)'.

The affirmation of the IDRs and senior debt ratings reflects PR's strong strategic importance, legal and operational links with the Russian Federation (BBB-/Negative), the company's ultimate sponsor, as well as its role as the national postal operator.

KEY RATING DRIVERS
PR's ratings are equalised with those of Russia, which reflects PR's status as an extension of the government in providing strategically important universal postal services, tight control and 100% state ownership. They also reflect the company's operational and financial integration with the sovereign. Fitch uses its public-sector entities rating criteria in its analysis of PR and views it as a credit-linked entity.

Close ties with the state is a key rating factor, which in Fitch's view implies a high likelihood of support if needed. PR is a national postal operator, engaged in regulated and non-regulated services. It has a legal status of federal state unitary enterprise (FSUE), which implies strong legal links with the Russian Federation.

Fitch views PR's possible change from FSUE to 100% state-owned shareholding company as a necessary step in attaining greater operational efficiency and not affecting its strong ties with the state. The decrease of the government's stake in PR below control could be considered rating negative, implying less importance and therefore weaker links with the state. Fitch expects PR's conversion into a shareholding company may be performed before 2018.

Fitch projects that in 2016, PR will launch banking services to supplement the company's income from postal operations. In this regard, in September 2015 PR set up a 100% owned subsidiary Postal Finance, which will develop the Postal Bank franchise in alliance with state-owned VTB bank (the second-largest bank in Russia. According to the original plan, Postal Finance will own 50% minus 1 share in the Postal Bank. As a result, PR will receive the proceeds as a shareholder of the bank and payments for the use of its extensive branch network.

Fitch considers state control and oversight over PR's operations as strong. The statute of the company is approved by government, while the CEO's contract is signed by the Minister of Communications. The company's strategy, budget, borrowings and material transactions has to be authorised by the government of Russia. PR is listed as a natural monopoly and strategically important entity in Russia, its tariff-regulated and market-dominating operations are subject to strict government control. We do not envisage any material weakening of this control mechanism in the medium term.

Fitch expects an increase in PR's debt to RUB31.1bn by end-2015 (2014: RUB29.6bn) and to RUB49bn in 2016. Domestic bonds represented 52% of total debt stock as of 30 September 2015. The company has FX exposure as EUR-denominated loans accounted for 15% of outstanding debt by 30 September 2015. Those loans are ECA-guaranteed and aimed for the purchase of special postal and sorting equipment. Fitch notes that PR has sufficient FX revenue and accumulated cash holdings, which safely cover FX-denominated debt servicing.

PR's projected debt growth is mostly capex driven (RUB69bn in 2015-2017) due to active phase of market oriented modernisation. In accordance with PR's development strategy, roughly half of the capex will be provided through debt financing. Major portion of funding is expected to stem from domestic bond issuance. In 2015 Russia decided to invest a portion of the state pension fund in PR's corporate bonds using the state development bank Vnesheconombank (BBB-/Negative). Fitch views this as an additional sign of PR's financial integration with the state.

PR has a sound liquidity cushion. As of 30 September 2015, the company's cash and deposits totalled RUB22.7bn, which 1.8x covers the debt due in 2015-2017. Furthermore, the company has access to committed credit lines up to RUB9bn. This fully offsets immediate refinancing risk. Cash holdings are mostly deposited in state-owned banks.

RATING SENSITIVITIES
PR's ratings and Outlook are equalised with those of Russia and are likely to mirror them in the medium term. Weaker links with the state, as reflected in a potential change of legal status leading to material reduction of the state's participation in the company, or a lack of financial support in case of a significant deterioration in PR's financial sustainability would be negative for the ratings.