Credit ratings agency S&P Global Ratings says NZ Post is facing 'ongoing structural decline' in its traditional business and will have reduced financial flexibility after sale of Kiwibank to the Crown

NZ Post's been given a "negative outlook" by credit ratings agency S&P Global Ratings in the face of "ongoing structural decline" in its traditional business and following its sale of a 53% stake in Kiwibank to the Crown.

S&P said that on September 28 it had revised its rating outlook on NZ Post's "long-term issuer credit rating" on NZ Post to negative from stable.

"At the same time, we affirmed our 'A' long-term and 'A-1' short-term issuer credit ratings on the group."

The ratings agency said the negative outlook "reflects our expectation that NZ Post's leverage will remain higher than our expectations for the rating, at least until the group's restructuring initiatives and capital investment program deliver earnings uplift and balance sheet relief".

S&P said an ongoing structural decline in NZ Post's letter business, together with moderating parcel growth and "significant cost inflation", will weigh on the group's earnings over the next 12-24 months.

"In our view, the group also has reduced financial flexibility following its divestment of retail bank Kiwi Group Holdings Ltd. (Kiwibank) in fiscal 2023 (ended June 30, 2023).

"We forecast NZ Post's S&P Global Ratings-adjusted debt-to-EBITDA ratio will remain elevated at about 3.3x in fiscal 2024, with improvement to less than 2.5x likely in fiscal 2025. The recovery is contingent upon parcel volume growth, price increases, and ongoing efficiency gains over the next 18 months."

NZ Post had reported "significantly weaker" financial performance than S&P expected in fiscal 2023, with an adjusted debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 5.3x (including restructuring expenses of NZ$43 million), up from 2.3x in the prior year. 

(NZ Post's after-tax profit dropped to $49 million from $102  million.)

"The weaker credit metrics were despite the group retaining part of the proceeds of the Kiwibank divestment during the year."

The NZ Post group's shareholding in Kiwibank historically served as a source of financial flexibility and cash flow in the form of dividends received, S&P said.

"As a result, we have removed the positive one-notch capital structure modifier to reflect the loss of this high-quality asset. In fiscal 2023, NZ Post sold its 53% stake in Kiwibank to the Crown for NZ$1,117 million. It paid NZ$717 million by way of special dividend to the Crown, retaining the balance of NZ$400 million to fund its transformation investment and restructuring initiatives."

S&P said NZ Post's ability to sustain a financial risk profile "consistent with the current rating" hinges on longer-term parcel growth and cost savings outpacing the structural decline in the mail business.

"The group is heavily reliant on effective and timely restructuring of its mail operations to stabilise and improve its profitability. While price increases and cost savings (including workforce reduction) are likely to help offset the ongoing volume decline over the next three years, a faster fall in mail volume than we expect may add to earnings pressure."

NZ Post will continue to benefit from "a very high likelihood of extraordinary support" from the New Zealand government in times of financial stress," S&P said.

"We also expect the government to provide ongoing support for the group's continued evolution of its cost base to match declining mail volumes and support profitability. This support was seen through the government's equity injection into NZ Post in fiscal 2021, as well as its three-year operational funding support (service contract) to offset losses in the mail business between 2021 and 2023."

The negative outlook given reflects the potential for the rating to be lowered in the next 12-18 months if NZ Post is unable to improve its earnings and financial risk profile beyond fiscal 2024 such that the adjusted debt-to-EBITDA is sustainably below 2.5x, S&P said.

"Uncertainty remains over the timing and magnitude of transformation and restructuring initiatives, which we expect will deliver earnings uplift and balance sheet relief."

S&P said it could lower the rating if it expect NZ Post's debt-to-EBITDA ratio to remain above 2.5x beyond the next 12-18 months. A downgrade could also eventuate if the competitive position and profitability of NZ Post's parcel businesses erodes significantly, even if the group maintains improvement in its financial risk profile.

"Pressure on the ratings may also arise if our assessment of the likely level of extraordinary support from the NZ government weakens. This could include a scenario where the government flags its intention to sell down its ownership in the group."

On the other hand, S&P could revise the outlook to stable over the next 12-18 months if NZ Post restores its profitability and is likely to maintain its adjusted debt-to-EBITDA ratio below 2.5x.

"Rating stability would also likely rely on the group maintaining its strong position in the parcels market, and benefitting from regulatory support and a credible strategy to mitigate losses in the mail business."