Fonterra faces credit downgrade

Credit rating firm Standard & Poor's today put dairy giant Fonterra on notice of a credit rating downgrade.

S&P said that it had placed its AA-minus rating on Fonterra Co-operative Group on CreditWatch with negative implications.

The 'A-plus' rating on Fonterra's subordinated capital notes was also placed on CreditWatch.

"The CreditWatch is not the result of a step change in Fonterra's credit quality, but rather the culmination of incremental evolutionary changes in Fonterra's business and financial risk profile," the agency said.

Fonterra's growth strategy was likely to weaken its financial flexibility over time, S&P said.

The flexibility afforded by the subordination of payments to milk suppliers in New Zealand had been the key rating factor supporting the current ratings.

"Standard & Poor's expects the proportion of milk production benefiting from this subordination to continue its declining trend as production from other markets, including Australia, continues to outstrip production growth from New Zealand milk suppliers.

"Also of concern is the group's significantly higher debt levels at the fiscal 2006 balance date."

Fonterra's debt gearing of 52.1 per cent was outside the group's preferred target gearing range of 45-50 per cent.

A final decision on the rating would be made within a month of completing its review.

If the rating is lowered, it would likely be limited to a one-notch downgrade to A-plus/A-1, S&P said.

- NZPA