Fonterra at risk of credit downgrade on price slump, high debt-S&P

[WELLINGTON] Standard and Poor's said on Thursday New Zealand's Fonterra, the world's largest dairy exporter, was at risk of a credit downgrade due to its high debt levels and a global price slump, concerns the co-operative said it is already addressing.

The ratings agency's move comes as Fonterra, which controls about a third of the global dairy trade, is feeling the pain of a more than 40 per cent slump in global dairy prices since early this year as buying by China has dried up and other producers have ramped up production.

The co-operative has also expanded in China by taking a stake in infant formula maker Beingmate. It had borrowings of around NZ$7.5 billion (S$6.93 billion) as at July 31 last year, with a debt-equity ratio of 51 percent, which helped fund the Chinese stake buy and add extra processing capacity. "High debt levels reflecting the sizable acquisition of a shareholding in China-based Beingmate, combined with peak capital expenditure, at this low point in the dairy price cycle will place Fonterra's key credit metrics under pressure in the short term," S&P credit analyst Brenda Wardlaw said in a statement. "We would expect that if we were to lower the ratings, the downgrade would not exceed one notch." S&P, which rates Fonterra's long term debt 'A' and short term 'A-1', put Fonterra on a negative credit watch. A downgrade would likely make borrowing more expensive.

Fonterra said it has already moved to bolster its balance sheet by cutting capital spending, lowering its advance payment to suppliers, and cutting business costs. "While current global prices are unsustainably low, we take a longer term view of the cyclical nature of the international dairy market and have confidence in the fundamentals for dairy,"said chief financial officer Luke Paravicini, adding that debt levels were "in line with expectations".

Last week Fonterra slashed its forecast payout to its suppliers by 27 per cent to NZ$3.85 a kilo of milksolids because of the slide in prices, oversupply and reduced demand.

It said it planned to cut capital spending by between NZ$500 million to NZ$600 million over the coming year.

Separately, Fonterra said it would reduce the amount of produce it will sell through its twice-monthly auctions, where prices have been in free fall since February.

Fonterra is owned by about 10,500 shareholder farmers. Dairy produce accounts for more than a quarter of New Zealand's export earnings.

REUTERS