How might the reported results affect the credit rating and borrowing costs for USPS?

Impact of the FY 2025 Q3 results on USPS’s credit rating and borrowing costs

Synthesis – What the results likely mean for USPS’s credit profile and financing costs

1. Rating pressure from the widening controllable loss

   • The $522 M increase in controllable loss is a clear red‑flag for profitability. Rating agencies will most likely downgrade the rating (or at least issue a negative outlook) unless the loss is offset by a credible, quantifiable turnaround plan.
     
   • A downgrade would move USPS from the “AA” range (typical for a government‑backed entity) to the “A” range, which historically translates into a 30‑50 bp widening of the spread on its commercial paper and bond issuances.

2. Mitigating effect of USPS Ground Advantage growth

   • The continued expansion of the low‑cost Ground Advantage service demonstrates a potentially sustainable revenue stream. If the Postal Service can show that this segment is narrowing the loss margin (e.g., by delivering a positive contribution margin of $X M per quarter), agencies may limit the rating impact to a “stable” or “negative” outlook rather than a full downgrade.
     
   • In the short term, the market will still price the overall loss higher, but the incremental spread increase may be capped (e.g., 10‑20 bp instead of 30‑50 bp) if G‑A growth is convincingly quantified.

3. Leadership transition and reform expectations

   • David Steiner’s appointment introduces policy uncertainty. Rating agencies will scrutinize his first‑quarter actions: cost‑reduction initiatives, asset‑sale plans, or new revenue‑generation projects. A transparent, data‑driven turnaround plan could result in a “stable” rating despite the loss, keeping borrowing costs relatively unchanged.
     
   • Conversely, if Steiner’s plan is vague or delayed, the negative rating pressure intensifies, and borrowing costs could rise sharply as investors demand a higher risk premium.

4. Borrowing‑cost outlook for the next 12‑24 months

   • Immediate effect: Existing debt will be re‑priced at current spreads; any refinancing in the next 6‑12 months will likely see a higher coupon (e.g., 2.5% → 2.8% on a 5‑year note) due to the rating shift.
     
   • Medium‑term effect: If G‑A growth and Steiner’s reforms start delivering measurable cash‑flow improvements, the spread could compress again, potentially returning to pre‑loss levels within 18‑24 months.
     
   • Worst‑case scenario: A full downgrade to “A‑” or “BBB‑” would push the spread to 100‑150 bp over Treasuries, dramatically increasing the cost of capital and forcing USPS to rely more heavily on short‑term commercial paper (which itself would be priced at a higher discount).

Bottom‑line take‑aways

• Credit rating: The FY 2025 Q3 results are likely to trigger a rating downgrade or at least a negative outlook because of the sizable increase in controllable loss. The downgrade magnitude will be tempered by the growth of USPS Ground Advantage and the clarity of the new Postmaster General’s turnaround plan.
• Borrowing costs: A lower rating will raise the risk premium on USPS’s debt. Expect a 30‑50 bp widening of spreads on new issuances if the rating falls from “AA‑” to “A‑”. If the Ground Advantage segment and reform actions can be quantified and shown to improve cash flow, the spread increase may be moderated to 10‑20 bp. In the worst case (significant downgrade), spreads could expand to 100‑150 bp, sharply increasing the cost of borrowing and putting additional pressure on the Postal Service’s balance sheet.