Fitch ratings says Fonterra "stable" at "AA-"

International credit agency Fitch Ratings today affirmed Fonterra's long-term issuer default rating (IDR) at "AA-" and short-term IDR at "F1+", with a stable outlook.

Fitch has also affirmed the ratings of Fonterra's senior unsecured notes at "AA-" and subordinated notes at "A+".

It said ratings of Fonterra continued to be underpinned by the "financial flexibility" of having other creditors given precedence over the cooperative's own farmer shareholders -- the farmers effectively carry the risk associated with volatile global dairy prices and currencies.

The ratings also reflected the efficiency of the NZ dairy industry, its status as one of the world's leading producers, and Fonterra's role as a cornerstone of the country's economy, "and the agency's assessment of implicit government support for the dairy industry in the event that it were ever required".

Fonterra has managed its way through the global financial crisis despite a sharp contraction of dairy prices and the re-instatement of tariffs in the European Union and subsidies in the United States.

Constraints on capital-raising limited its financial flexibility, but the agency noted Fonterra is now part way through a capital structure plan to address redemption risk and access to equity capital.

Farmers have already subscribed to "dry" shares in excess of the minimum numbers they have to hold to qualify as suppliers, and are due to vote later this year on axing the guarantee that Fonterra will always buy back their cooperative shares.

Instead, farmers are to be asked to redeem their shares by selling them to other suppliers. In addition, the company has started to retaining part of its surplus rather than paying it out to farmers.

"The capital structure plans and retention policy will secure additional capital and improve financial flexibility, thereby ensuring that Fonterra is more comfortably placed within its rating level," said Vicky Melbourne, senior director in Fitch's corporate team.

A further boost to Fonterra's rating was considered unlikely in view of Fonterra's heavy reliance on a single product and single country for its inputs.

A negative rating action could be triggered by any structural changes that would affect the level of subordination, or debt-funded acquisition to the point that leverage (total debt to operating profit before interest and taxes and depreciation and amortisation have been subtracted) moved to a multiple of around 2.5 on a sustained basis.

- NZPA