OREANDA-NEWS. Fitch Ratings has affirmed Poste Italiane's (PI) Long-Term Issuer Default Ratings at 'BBB+' with Stable Outlook, and Short Term IDR at 'F2'. Fitch has also affirmed the long term/short term ratings of 'BBB+'/'F2' on PI's EUR2bn euro medium-term note programme (EMTN) and EUR750m bond (XS0944435121).

The affirmation reflects Fitch's expectations of continuing linkages with Italy's national government (BBB+/Stable), which the agency, using a top-down approach, regards as sponsor under its 'Rating of Public Sector Entities Outside the United States' criteria, as well as sound fundamentals on a stand-alone basis.

KEY RATING DRIVERS
Integration: stronger - Fitch does not expect PI's integration with Italy's national government to significantly diminish over the medium term. The agency expects the public sector will continue to account for about 40% of PI's unconsolidated revenue or around EUR9bn in 2016-2017, and nearly 80% of assets (EUR175bn in 2015 when the insurance business is also considered).

Strategic Importance: stronger - PI funds 20% of Italy's EUR2.2trn debt, including investments in Italy's bonds by PI's subsidiary Poste Vita (BBB+/Stable) and saving accounts distributed for Cassa Depositi and Prestiti (BBB+/Stable). PI is Italy's dominant operator in mail delivery - including the universal service - with nearly 85% of the market share and is the sixth largest for parcel delivery with about a 15% share. With a EUR0.6bn EBIT loss in 2015 PI's mail and parcel remain loss-making and cross-subsidised by the financial and insurance sectors.

Control: strong; Legal Status: weaker - Italy listed 35% of PI shares on the Milan Stock Exchange in 2H15 as part of the national government's drive for privatisation and Fitch expects further shares to be divested over the medium term. Limits to voting rights for private investors holding more than 5% of the shares are conducive to eventually maintaining PI under the control of the national government.

Operations
Although PI's credit linkage to the national government implies a high probability of extraordinary support in case of need, the company on a standalone basis already exhibits 'BBB' category characteristics. These include rebounding net profits and modest financial debt on Fitch's computation, which excludes current accounts.

Fitch expect PI's unconsolidated EBITDA margin to remain around 10% in 2016-2017, with capital gains on asset sales offsetting costs to streamline the nearly 140,000 headcount base or unexpected decline in revenue from financial or postal services. Total unconsolidated debt is seen remaining around 2x-3x EBITDA (1.6x in 2015) over the medium term; even in a scenario of debt increase to fund investments, including EUR3bn to upgrade its logistic platform or strengthen asset management, Fitch expects PI to maintain the ratio at below 5x EBITDA, in line with the 'BBB' rating category for transport/logistic companies. Fitch expects group debt-to-EBITDA (3.6x in 2015) to also remain below 5x and annual operating cash flow (FFO) at about EUR1bn. PI has no material refinancing needs until 2018.

Fitch expects revenue from the Bancoposta - a PI division with segregated accounts - to increase towards EUR6bn by 2017, up 10% from the 2012-2014 average while investments to strengthen PI's role in parcel delivery could contribute to halting the downward revenue trend from postal services. Fitch expects revenue from mail and parcel delivery to halve to EUR2.5bn over 2008-2017 (EUR3bn in 2015).

Capitalisation and profitability of PI's insurance business are at the high-end of the 'BBB' category. Underwritten premiums doubled to EUR18bn during 2011-2015, and Fitch expects insurance to remain the most vibrant sector of the group in terms of revenue growth over the medium term, albeit at a slower pace than the 20% average in 2013-2015.

Contribution to PI's unconsolidated revenue from commissions for the distribution of policies and dividends will rise towards 8-10% by 2017, from 5.6% in 2015 (2% in 2012). A protracted period of low interest rates may drain resources in light of the contractually guaranteed returns of Poste Vita's life insurance policies although interest rate risks are largely mitigated by asset/liability maturity match.

RATING SENSITIVITIES
The ratings and Outlook will likely continue to reflect those of Italy over the medium term in light of the credit linkage. Negative rating action could be triggered by an unexpected deterioration of PI's profitability if Fitch concludes that income losses are reflective of weaker financial support or integration with the national government.