More eyes on Fonterra credit rating

Taster Alison Cradock at work at Fonterra's Waitoa cheese factory. Diversification may help dent the co-op's credit rating. Picture / Dean Purcell

A second major credit rating agency has expressed concern about Fonterra's debt and risk profile.

Last month, Standard & Poor's placed Fonterra on creditwatch with negative implications, meaning there is a strong chance its "extremely high" AA-/A-1+ credit rating will be cut.

This warning reflected Fonterra's expansion away from its core New Zealand dairy business and its higher-than-targeted debt.

Sourcing more milk offshore from non-co-op members could affect its credit rating. Payments to non-co-op members are not subordinated behind other creditors, as are payments to co-op farmers.

Fonterra said last month it did not expect any Standard & Poor's downgrade to have a "material" effect on its business.

Now Fitch Ratings has announced Fonterra has been placed on "negative outlook", citing issues covered by Standard & Poor's.

Fitch said the gradual increase in milk from third-party suppliers and a growing proportion of value-add businesses had changed Fonterra's business-risk profile.

"Fitch believes this is likely to weaken its financial flexibility as the proportion of milk production benefiting from subordination will continue to decline."

A Fitch spokesman said Fonterra's spending on acquisitions, critical capital expenditure projects and higher working capital requirements had seen the co-op's net debt rise to $5.63 billion. That had pushed its gearing ratio (net debt to net debt plus equity) to 52 per cent, above its target 45 to 50 per cent.

But Fitch expected Fonterra's debt to return to its target range as capital spending requirements eased.

"That said, Fonterra's rating may come under pressure should the present degree of leverage become a more permanent feature of its financial profile," the spokesman said.

Following the Fitch announcement, a Fonterra spokesman said the co-op had nothing to add to its earlier comments on the Standard & Poor's move.

Rating watch

* Fonterra's debt and ability to repay creditors have now received attention from two credit rating agencies.

* Fitch has followed Standard & Poor's recently announced review by putting Fonterra on "negative outlook".

* Fonterra previously indicated it was not concerned.


- additional reporting NZPA