Standard & Poor's reduces Fonterra credit rating over debt concerns

13-Oct-2015 - Last updated on 14-Oct-2015 at 19:48 GMT

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Standard & Poor's (S&P) has reduced Fonterra's credit rating - reflecting its concerns about the New Zealand dairy's debt levels.

Earlier today, ratings agency S&P downgraded Fonterra's long-term rating from 'A' to 'A-1' and its short-term rating from 'A-1' to 'A-2.

"The downgrade reflects our view that Fonterra's financial risk profile has weakened in the past two years, as the company's peak capital expenditure and sizable debt funded acquisition coincided with a high level of volatility in the global dairy market," said Brenda Wardlaw, credit analyst, S&P.

S&P's downgrade prompted New Zealand-based Fonterra, the world's largest dairy exporter, to defend recent investments, including its March 2015 $553m acquisition of an 18.8% stake in Chinese infant formula manufacturer, Beingmate.

“We carefully planned our investment strategy by first reducing our gearing over a number of years to enable us to make higher levels of investment in key strategic opportunities," said Lukas Paravicini, chief financial officer, Fonterra.

“These investments are making the Cooperative stronger and positioning us well for the future. We have built additional manufacturing capacity in our home base of New Zealand which is improving returns by giving more product options during the peak production period and our planned investments in China are building our presence in our number one strategic market," Paravicini added.

S&P has, however, removed Fonterra from its negative Creditwatch, where it placed the New Zealand dairy in August.

It added that the outlook for Fonterra is "stable."

Despite Fonterra's "exposure to the volatility associated with the global dairy market," Wardlaw said S&P expects the Kiwi cooperative to "maintain it financial performance in line with our expectations for the 'A-' rating."

Paravicini added that S&P's revised rating "will not have any impact on Fonterra's strategy or on farmer shareholder payout."

Fonterra's farm gate milk price (FGMP) forecast for the 2015/16 season currently stands at NZ$4.60 per kilogram of milk solids (kgMS). With an earnings per share of between NZ$0.40 and NZ$0.50, Fonterra's forecast total payout for the 2015/16 season stands at between NZ$5.00 and NZ$5.10.

It ended the 2014/15 season with a FGMP of NZ$4.40 per kgMS - a figure approved by the New Zealand Commerce Commission in September.