Fonterra unfazed by credit rating cut

Fonterra's plan to buy a stake in a Chinese firm shows a more aggressive risk appetite, says S&P. Photo / Christine Cornege

Dairy firm says balance sheet solid despite credit rating downgrade by Standard and Poor's

Fonterra chief financial officer Lukas Paravicini said the cooperative continued to enjoy a solid balance sheet position, despite a credit rating downgrade by Standard and Poor's (S&P) on Friday.

S&P affirmed Fonterra's short-term rating of A-1 but lowered its long-term rating on Fonterra and its rated senior unsecured notes to A from A plus with a stable outlook on the long-term rating.

The agency also lowered the rating on Fonterra's subordinated notes to A minus from A.

S&P's competitor, Fitch Ratings, last week affirmed Fonterra's long and short-term issuer default ratings at AA minus and F1 plus, with a stable outlook.

Fitch has also affirmed the ratings of Fonterra's senior unsecured notes at AA-, subordinated notes at A plus, and commercial paper at F1 plus.

Paravicini, in a statement to the NZX yesterday said "the agencies' ratings of AA minus and A continued to reflect Fonterra's solid balance sheet position, and strong liquidity and gearing".

Fonterra last week announced a plan to spend $615 million on taking a 20 per cent stake in Chinese infant formula company Beingmate and to spend $555 million on increasing its manufacturing capacity in New Zealand.

S&P, in its report, said: "We see the equity investment as evidence of a risk appetite that is higher than our previous rating expectations."

"In our view, Fonterra's proposed shareholding in a commercial company in China indicates a financial risk appetite that is more aggressive than what we had factored into the previous 'A plus' rating," it said.

Fonterra chief financial officer Lukas Paravicini.

"This is notwithstanding the fact that the proposed transaction does not affect Fonterra's effective subordination of milk payments to suppliers and its resultant discretion in setting the estimated forecast milk price," the agency said.

Even if the proposed transaction did not proceed, the intention to acquire the equity stake was viewed by S&P as a more aggressive strategy.

A distribution agreement with Beingmate would facilitate growth in sales of Fonterra's New Zealand-manufactured infant formula in the growing Chinese market.

A joint-venture arrangement for ownership of Fonterra's Darnum manufacturing plant in Australia is also planned, with Beingmate acquiring a 51 per cent ownership interest.

This transaction is occurring at a time when Fonterra is also undertaking large investments in plant expansion and optimisation in New Zealand, which would cost about $555 million over the next few years.

"In addition, global dairy product prices are currently weak, resulting in a reduction in the estimated forecast milk price to $6 per kg of milk-solids early in this season, from $7 per kilogram," S&P said.

"If Fonterra were to undertake further material debt-funded transactions, particularly in higher-risk geographies that alter the supply mix that may also undermine the subordination benefit, downward pressure on the rating could occur," it said.

Units in the Fonterra shareholders fund last traded on the NZX at $6.15, down 2c from Friday's close.