deutsche post agm.dp-dhl.de/content/dam/dpdhl/investoren/creditor_relations/rating/... ·...

CORPORATES

CREDIT OPINION14 September 2016

Update

RATINGS

Deutsche Post AGDomicile Germany

Long Term Rating A3

Type LT Issuer Rating

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Lorenzo Re 39-02-9148-1123VP-Senior [email protected]

Marina Albo 44-20-7772-5365Managing [email protected]

Giuliana Cirrincione 39-02-91481-126Associate [email protected]

Deutsche Post AGUpdate Following Recent Affirmation at A3

Summary Rating RationaleDeutsche Post's (DP) A3 rating reflects the group's strong business profile, which is theresult of its (1) scale and global presence as the world's largest logistics company; (2) largeand robust mail business in Germany; (3) expectations of profitability recovery throughits network investments and restructuring programs; and (4) financial metrics, with Debt/EBITDA at 2.7x and RCF/debt at 20.4% in the LTM as of June 2016 that are commensuratewith the current BCA. The rating also reflects the group's conservative financial policy andsound liquidity profile.

DP's key financial metrics reflect (1) challenging and competitive market conditions; (2)the group's exposure to the global macroeconomic trends in its logistics business andthe structural decline of the traditional postal services; and (3) the company's multi-yearrestructuring programme for its Supply Chain and Forwarding businesses.

In addition, Deutsche Post's overall rating is driven by our assessment of the defaultdependence between the group and the German state, and of the probability of Deutsche Postreceiving government support in the event of need, which results in a one-notch uplift fromthe baseline credit assessment (BCA) of baa1.

Exhibit 1

Deutsche Post's Operating Margins and Leverage

2016F and 2017F are Moody's forecasts for 2016-2017, not issuer's.Source: Moody's Financial Metrics™.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1038599

MOODY'S INVESTORS SERVICE CORPORATES

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 14 September 2016 Deutsche Post AG: Update Following Recent Affirmation at A3

Credit Strengths

» Strong business profile and large scale, supported by global leadership positions in express and logistics and its large German mailbusiness

» GRI support built into the rating due to the German government's 21% indirect ownership and the essentiality of its services to theGerman economy

Credit Challenges

» Exposure to highly competitive mature markets, global macroeconomic volatility and structural decline of traditional postalbusiness

» Implementation of multi-year restructuring programme for its Supply Chain and Forwarding businesses, whose low profitability iskeeping overall operating performance and key credit metrics under pressure

Rating OutlookThe stable outlook reflects our expectation that Deutsche Post will sustain the improvement to its top-line earnings and profitabilityand key credit metrics achieved over the past few years, as well as maintain a conservative financial policy and a solid liquidity profileat all times.

Factors that Could Lead to an Upgrade

» Retained cash flow (RCF)/debt ratio above 30%

» Adjusted debt/EBITDA below 2.5x

» A higher BCA (assuming that our assessment of moderate support remains unchanged)

Factors that Could Lead to a Downgrade

» Adjusted debt/EBITDA above 3.5x

» RCF/debt ratio below 20% on an ongoing basis

» A lower BCA or, should the government reduce its stake in DP, a downward revision of our assessment of moderate support



Key Indicators

Exhibit 2

Deutsche Post's Key Indicators

All figures and ratios are calculated using Moody’s estimates and standard adjustments. Moody's Forecasts (f) or Projections (proj.) are Moody's opinion and do not represent the views ofthe issuer. Periods are Financial Year-End unless indicated. LTM = Last Twelve Months. LTM figures do not reflect the pension funding from April in the pension adjustmentSource: Moody's Financial Metrics™.

Detailed Rating ConsiderationsSTRONG BUSINESS PROFILE SUPPORTED BY DOMESTIC AND GLOBAL LEADERSHIP POSITIONS

With €57.8 billion in revenues as at end-June 2016 (on a last-12-month (LTM) basis), Deutsche Post is the largest mail operator in Europeand the world's largest logistics service provider. The group delivers more than 60 million letters and over 3.9 million parcels daily inGermany, and has a global network that provides express and logistics services in more than 220 countries. The group's operations includeits mature, declining mail activity (17% of revenues in 2015) and the more dynamic parcel (11%), express deliveries (23%), supply chain(27%) and freight forwarding businesses (25%); the latter two of which are more influenced by economic cyclicality.

Given Deutsche Post's incumbent market position and established domestic mail network, the group's revenue mix is weighted towardsEurope, and Germany in particular. However, Deutsche Post is one of very few large logistics companies with a comprehensive globalnetwork. Globalisation and increasing manufacturing in low-cost countries have led to a growing demand for express and logisticsactivities and, as a result, a greater proportion of Deutsche Post's revenues are now generated in emerging markets, especially in Asia-Pacific (17% of the company's revenues in H1 2016).

Exhibit 3

Revenue Breakdown by RegionH1 2016

Exhibit 4

Revenue Breakdown by DivisionH1 2016

Source: Deutsche Post Interim Report Source: Deutsche Post Interim Report

DECLINING MAIL VOLUMES IN GERMANY OFFSET BY PRICE INCREASES, PARCELS AND CONTINUED GROWTH IN THE EXPRESSDIVISION



We expect that growth prospects for Deutsche Post's domestic and international parcel business and express division will compensatefor the decline in its traditional postal activities. The contribution of Deutsche Post's largest division, Post-eCommerce-Parcel (PeP), tothe company's total revenue is gradually declining over time, as postal volumes are on a long-term declining trend as a result of thegeneral substitution of traditional mail items with electronic communications. Total mail volumes continued to decline by 2.8% year-on-year in the first half (H1) 2016, after a 6% drop in 2015 versus prior year. Nevertheless, Deutsche Post's PeP division has been ableto maintain market share in Germany and to increase its revenue by almost 5% in H1 2016 from previous year owing to (1) the pricestamp increase in 2016 that fully offset the volume decline; and (2) a growing parcel delivery business, both in Germany and in the restof Europe. Parcel delivery has been growing both in terms of volumes (+8.7% in H1 2016 in Germany versus H1 2015) and revenues(+11.3% in H1 2016 versus H1 2015) owing to the rise in internet commerce and other e-Post products. While the group's traditionalpostal volumes will continue declining at single digit rates year-on-year, we expect that PeP division's profitability will grow moderatelydriven by eCommerce and parcels.

DHL's Express division represents an additional growth driver of the company, both in terms of volumes and reported EBIT. Despiteunfavorable forex and lower fuel surcharge, the division saw an increase in its revenue and profitability, both at FYE-15 and in the firsthalf of 2016, driven by increased volumes, pricing initiatives and an improved cost structure. Express reported a 9.7% year-on-yearincrease in H1 2016 EBIT and its EBIT margin in the second quarter of 2016 improved by 10 basis points year-on-year to 11.9%.

Exhibit 5

Reported EBIT and EBIT Margin by DivisionH1 2015 and H1 2016

Source: Deutsche Post Interim Report

VOLATILE MACROECONOMIC CONDITIONS AND MULTI-YEAR RESTRUCTURING PROGRAMME HAVE KEPT OPERATINGPERFORMANCE UNDER PRESSURE BUT BENEFITS SHOULD BECOME VISIBLE IN FY2016 RESULTS

We expect Deutsche Post's operating performance to improve slightly in 2016, after its reported EBIT dropped to €2.4 billion in 2015from €3 billion the prior year. While some one-offs had a negative impact on the performance in 2015 (primarily the German mail andparcel workers' strike), Deutsche Post's profitability was also challenged by (1) the multi-year restructuring measures implemented acrossits Supply Chain and Forwarding businesses; and (2) the overall volatile macroeconomic conditions which put under pressure the GlobalForwarding, Freight and Supply Chain divisions.

However, the introduction of cost control initiatives have already started to bear fruits in the first half of 2016, with a reported EBIT of €1.6billion YTD June 2016, which represents an increase of almost 30% compared to the same period last year. Besides the contribution fromorganic growth in the Express and the PeP divisions, the recovery in the group's profitability will be driven by a successful implementationof its restructuring programs, although we expect the improvement in credit metrics to be gradual. According to our estimates and ona Moody's adjusted basis, Deutsche Post's EBIT margins will improve but will still remain at mid single-digit while EBITDA will grow onlymoderately to approximately €7 billion by end-2016 (€6.7 billion at end-2015) and to €7.6 billion by end-2019. As a result, leverage -measured as gross debt-to-EBITDA - should remain between 2.7x-2.6x in the next 12-18 months. Although the group's free cash flow in2016 will be negative reflecting the significant capex requirements for the Express and PeP divisions (€1.5 billion out of the group's total



€2.2 billion), the €1 billion pension funding payment made in April this year, and the €1.15 billion dividend, Deutsche Post's capacity togenerate operating cash flow will remain strong and will increase gradually over time, as reflected by our expectation of retained cashflow (RCF) to debt ratio of 25%-27% in the next 12-18 months.

ONE-NOTCH UPLIFT BY VIRTUE OF CURRENT OWNERSHIP AND SUPPORT

In light of its existing ownership structure, we regard Deutsche Post as a government-related issuer (GRI), and under our GRImethodology, the group's A3 rating reflects a combination of the following inputs:

» A baseline credit assessment (BCA) of baa1

» The German government's Aaa rating

» Low default dependence

» Moderate probability of support

Our assessment of a moderate probability of support, in particular, reflects the social, economic and political significance of DeutschePost for Germany in light of (1) the importance of mail delivery and the group's Universal Service Obligation; (2) Deutsche Post's overallsize both in terms of revenues (given its status as one of the largest German corporates) and number of local employees (over 170,000staff in Germany alone); and (3) the high probability that the government will intervene in the event of need, despite the presence of EUregulations that limit direct support from the state. Despite the reduction in KfW's stake in the group in 2012 and 2013 (from 30.5% tothe current 21%), we believe the factors mentioned above are still enough to warrant a moderate support assumption. The government'sstated intention to reduce its stake in the group to zero could - in due course - lead to a lowering of our support assumption and anelement of the rating uplift under the GRI methodology.

The low default dependence reflects the fact that both the German economy and Deutsche Post are highly diversified, with the groupgenerating only around 30% of its revenues (at FYE 2015) within its domestic market.

Liquidity AnalysisDP exhibits an excellent liquidity profile, underpinned by the expectation of a strong and recurring operating cash flow of around €3billion in the next 12 months, large cash balances and full availability under its undrawn long-dated committed revolving credit facility(RCF). As of 30 June 2016, the company had total liquidity resources of €4.1 billion, comprising €2.1 billion in cash and cash equivalentsand €2 billion undrawn under its syndicated RCF. We expect these resources to more than cover cash outflows anticipated over the next12-18 months, primarily around €2.2 billion gross capex and an estimated €1.2 billion dividend payments in the first half of 2017.

DP shows a comfortable amortisation profile with an average debt maturity of over 5.3 years and no meaningful debt repayments in anygiven year. The final maturity of the company's RCF is September 2020 and it is not subject to financial covenants.

DP manages its currency, interest rate and commodity risks by using derivative instruments. The company's policy is to hedge an averageof up to 50% of all significant currency risks over a 24-month period, while interest rate risk is partially hedged using interest rate swaps.Finally, Deutsche Post's exposure to fluctuations in fuel prices is mitigated via a combination of fuel surcharges passed on to the customersand a small number of commodity swaps for diesel and marine diesel fuel used to control residual risks.

ProfileDeutsche Post AG, based in Bonn, Germany, is the incumbent postal operator in Germany and the world's largest logistics service providerwith total revenues of €57.8 billion as of 30 June 2016 (on a LTM basis). The company operates under four different divisions: Post -eCommerce - Parcel (PeP); Express; Global Forwarding, Freight; and Supply Chain. The first division trades both as Deutsche Post andDHL, the latter three divisions trade under the DHL brand.

Approximately 21% of Deutsche Post's share capital is owned by KfW Bankengruppe (KfW, rated Aaa stable), Germany's largest publicdevelopment bank, which serves the government's domestic and international public policy objectives.



Rating Methodology and Scorecard FactorsDeutsche Post's baa1 BCA is two notches lower than the outcome of our rating methodology for Global Surface Transportation andLogistics Companies. The two-notch differential reflects that while the company's scale and diversification raise the overall grid score,the baa1 BCA is more consistent with the company's financial metrics and profitability, that is currently penalized by the low marginof the Global forwarding and Supply Chain divisions. Other methodologies used include Government-Related Issuers methodologypublished in October 2014.

Exhibit 6

Rating factors

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations; [2] LTM 06/30/2016; LTM figures do not reflectthe pension funding from April in the pension adjustment; [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significantacquisitions and divestitures.Source: Moody’s Financial Metrics™.

Ratings

Exhibit 7Category Moody's RatingDEUTSCHE POST AG

Outlook StableIssuer Rating A3Senior Unsecured -Dom Curr A3ST Issuer Rating P-2

DEUTSCHE POST FINANCE B.V.

Outlook StableBkd Senior Unsecured -Dom Curr A3

Source: Moody's Investors Service



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