Fonterra’s credit rating has been downgraded for the second time in two weeks, this time by Fitch Ratings to A from AA-.
Fitch has also downgraded Fonterra’s Short-Term IDR to F1 from F1+.
The downgrade reflects Fitch’s view that Fonterra’s business profile has weakened and is now in line with an A-rated company.
According to Fitch, the rating continues to recognise the strong global market position of the co-operative’s ingredients business, the financial flexibility afforded by its ability to adjust the forecast milk price and the advance rate milk payments to farmer shareholders, and the effective subordination of farmer payments.
However, it stated that the impact of the recent volatility in the global dairy market, and more recently the low dairy prices, has illustrated a vulnerability to adverse business and conditions, which Fitch has now factored in.
The effective subordination of milk payments underpins the co-op’s financial flexibility and this in turn has been a robust credit enhancer, according to Fitch.
However, it also stated that the sharp fall in global dairy prices led to a weakening of this financial flexibility.
Fonterra elected not to reduce the level of advance rate milk payments in line with the sharp decline in milk prices in the financial year ended July 31, 2015 (FY15).
As a result, subordinated farmer shareholder milk payables declined by around NZ$0.9 billion at end-FY15, which the co-operative funded with bank facilities.
This, and higher debt to fund capacity expansion and the purchase of a stake in China’s Beingmate, led to deterioration in Fonterra’s credit metrics.
Fonterra’s credit rating downgraded by Standard and Poor
Fonterra’s credit rating has been downgraded by rating agency Standard and Poor from A to A-.
In response, Fonterra’s Chief Financial Officer Lukas Paravicini said that the New Zealand dairy giant’s underlying financial strength and credit quality remain strong.
“This is recognised by Standard and Poor’s maintaining our rating in the A category and reflects our fundamental strength and financial discipline.
“It is important to note that the revised rating will not have any impact on Fonterra’s strategy or on farmer shareholder payout,” he said.