Ben Aris in Moscow -
Russian Post (Pochta Rossii), the national postal service, was deemed one of Russia's most reliable and creditworthy companies in Russia at the end of September when Fitch awarded it an investment grade rating that propels into the "blue chip" league. It will have to be, as it gets ready to be transformed.
Fitch awarded the company a 'BBB' rating, which makes the company one of the four best rated companies in Russia - on a par with gas behemoth Gazprom, the Russian Railways transport monopolist and state-owned oil major Rosneft.
"Fitch Ratings has assigned FSUE Post of Russia (PR) a Long-term foreign and local currency rating of 'BBB', a Short-term foreign currency rating of 'F3' and a National Long-term rating of 'AAA(rus). The Outlooks for the Long-term ratings are Stable. The rating action also affects the company's outstanding domestic bonds (RUB7bn)," Fitch said in its announcement of the new rating.
The rating is important, as the post office is about to be transformed along the lines of a modern logistics company similar to those in Europe - and it looks like it will have to pay for most of its modernisation by itself.
The company has announced it plans to issue three tranches of seven-year bonds totalling RUB3bn each later this year. This would follow a hugely successful debut bond in March 2011, which was a RUB7bn issue with a yield of 8.25% that was nearly seven times oversubscribed.
Following the Fitch rating, the next round of bond issues should be even more popular. The company's investment-grade status will widen the circle of possible investors and following the opening of Russia's capital markets to international investors, expected to happen in November, these bonds would be an obvious target for international investors as well. "This creates opportunities for the qualitative and quantitative expansion of the pool of potential investors, and increase the investment attractiveness of the company," Fitch said in the statement.
Stamp of approval
Along with Sberbank, Russian Post is one of those few Soviet-era institutions that remain popular and relevant to modern life.
A population scattered across a vast territory that spans 9 time zones needs to be able to send things to each other quickly and inexpensively, and Russian Post has 42,000 branch offices (about twice as many as Sberbank's) covering the entire Russian Federation and delivers some 1.5bn letters to over 50m addresses a year. At the same time, the post office remains one of the main points of contact between the state and the people, being, among other things, the paymaster for state pensions as well as enabling retail payments and settlement services.
Surprisingly, the service is regarded by many as actually pretty good. "We sold to Russians right across the country and relied entirely on the postal service to deliver the goods and we had no complaints," says Pascal Lament, the founder of PPE, Russia's first consumer catalogue business. "The longest anyone had to wait for a delivery was two weeks."
And the international service is set to improve too. The senior management of Russian Post were in Qatar at the end of September at the "25th Universal Postal Congress", at which postal workers from around the world gathered to talk international cooperation. Russian Post signed a series of agreements that will speed up the delivery of letters and parcels from abroad and improve the reliability of international deliveries, by doing things like pre-sorting letters in the country from which they are sent into those destined for Russian cities and those due to transit Russia to Asia.
The state has been talking about modernising the post office for years, but the pace has picked up recently and the new rating is part of a broader plan to give the postal service a comprehensive makeover.
In September, Ministry of Communications and Mass Media was finalizing a draft bill to reorganize the post office that is supposed to be presented to the Duma this autumn. The post office development is based on a strategy worked out by consulting firm Boston Consulting Group and the draft bill removes the ban on the sale of shares in the company as well as creating two types of postal companies in Russia: a universal mail provider and courier companies similar to America's UPS and Germany's DHL, which will be able to set commercial unregulated tariffs for post deliveries.
The couriers are not expected to cause major financial losses to Russian Post since the state company's profits from express mail are fairly small. But the introduction of a relatively cheap national courier service will open up a raft of business opportunities to retailers that are currently focused on the 13 biggest cities. Indeed, as a precursor to the changes, Russian Post has already been in cooperation talks with companies like online retailer eBay, which opened an office in Moscow earlier this year.
Bond issues and other forms of financing are a key part of the modernisation plan. The post office has been called on to match the state's investment into its modernisation ruble for ruble and funding for the first stage will probably come out of the post office's own pocket as there is no investment allocation in the 2013 budget that was approved in September, says Fitch.
Fitch expects the company to increase its debt by up to RUB24.5bn by 2014, which still leaves it with "a conservative net debt/Ebitda below two-times in 2012-2014," says Fitch, adding that the bulk of the company's debt is long term with no refinancing risks until 2014 when the original bondholders have a put option on the RUB7bn debut bonds.
And Russia Post is already profitable, earning about RUB700m in 2011 on revenues of RUB3.4bn, against RUB480m of profits in 2010, the company said at the start of this year, with postal services accounting for 45% of the revenues and financial services another 38%, with the sales of goods and services making up the rest.
The upgrade of Russian Post would require from RUB50bn up to RUB100bn of the budgetary funds. "However, since the budget situation is rather complicated, we primarily pay attention to sources of interior effectiveness [of Russian Post]," Communications and Mass Media Minister Nikolai Nikiforov said at the start of September.
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