Second agency cuts Fonterra's credit rating

Fonterra's long-term credit rating has been cut by Fitch Ratings, the second global rating agency to do so in as many weeks.

Falling dairy prices and a volatile market are stretching the dairy exporter's balance sheet.

Fonterra's long-term foreign currency issuer default rating (IDR) has been lowered to A from AA- while its short-term IDR has been reduced to F1 from F1+. The outlook was stable.

“Recent volatility in global dairy markets and the slump in prices through much of the year "has illustrated a vulnerability to adverse business conditions," which Fitch says it has taken into account,

Fonterra's decision not to reduce the advance rate to farmer suppliers in line with the slump in milk prices, debt taken on to fund the $755 million purchase of 18.8 % of Shenzen-listed Beingmate Baby & Child Food Co, and interest-free loans to farmers to tide them through the current season weighed on the dairy processor's credit profile.

"While these actions support Fonterra's farmer shareholders' financial stability, they are to the potential detriment of bondholders and highlight a weakening of Fonterra's financial flexibility," Fitch says of the interest free loans.

The downgrade follows a similar move by Standard & Poor's last week, which lowered Fonterra's credit rating one notch to A-, citing the peak in capital expenditure and debt-funded Beingmate acquisition coinciding with market volatility and falling dairy prices.

Fonterra chief financial officer Lukas Paravicini said the revised ratings won't impact on the cooperative's approach to farmer payout.

Last week, the company reset the annual interest paid on its $35.1 million of perpetual shares listed on the NZX's debt market to 4.94% from January 10. The notes currently pay annual interest of 4.69%.

Fonterra's net finance costs jumped to $518 million in the year ended July 31 from $366 million a year earlier.

Fitch says it expects Fonterra's ratio of adjusted debt to earnings before interest, tax, depreciation and amortisation to reduce from 5.2 times in the current financial year, but doesn't anticipate it will fall below 1.5 times on a sustained basis over the rating horizon.

The ratings agency says it anticipates farmers’ level of debt to the value of milk solids production will remain above its historic average, but that suppliers should be able to service their finance costs aided by industry bodies.

(BusinessDesk)