S&P: Fonterra's credit rating ok, for now

Fonterra has increased the milk price for the current season to $6.75/kg from $6.55/kg and now expects to be outside its target end-of-year gearing range of 40 per cent to 45 per cent. Photo / NZME

Ratings agency S&P Global says Fonterra's credit ratings has not been affected by the co-operative's earnings downgrade for the year to July 31, even though it expects its debt threshold to be exceeded in the current financial year.

Fonterra yesterday increased the milk price for the current season to $6.75/kg from $6.55/kg and now expects to be outside its target end-of-year gearing range of 40 per cent to 45 per cent.

"We expect its debt to ebitda [earnings before interest, tax, depreciation and amortisation] to breach our downward threshold of 4 times for fiscal 2018," the agency said.

"Fonterra has very limited financial headroom within the current rating," it said.

"That said, we believe the group remains committed to retaining the 'A-' long-term credit rating and has a number of levers to manage debt levels."

Fonterra announced a further reduction in its full-year dividend range from 25c-30c to 15c-20c. In addition, Fonterra has not increased its advance rate for higher milk prices.

S&P expected Fonterra's credit metrics for fiscal 2019 to return comfortably within its key rating tolerance of debt to ebitda remaining below 4 times, after adjustments.

"Rapid increases in milk prices late in the financial year have increased input costs and working capital demands, particularly inventory," it said.

"This dynamic should reverse somewhat during fiscal 2019. We also expect the group to closely manage its capital expenditure, improve the efficiency of its existing assets, and maintain a prudent approach to shareholder returns."

The higher payout to farmer shareholders should relieve some of the financial stress experienced over the past few years, which prompted Fonterra to offer soft loans to its shareholder suppliers.

In fiscal 2019, Fonterra's balance sheet is likely to benefit from the receipt of about $185 million in farmer loan repayments.

Fonterra has already detailed its $183m in costs to French food group Danone over the WPC80 false botulism scare and product recall.

"We view costs associated with the Danone arbitration as non-operating and non-recurring, and therefore, adjust our ebitda calculation accordingly," S&P said.

Fonterra's debt levels increased by $232m due to costs associated with the arbitration.

"We also note that sustained competition in Greater China's foodservice market and further constraints in some Asian markets have limited Fonterra's ability to pass through higher input costs."