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Fonterra ratings on review at S&P in face of high debt

Fonterra ratings on review at S&P in face of high debt levels, low global prices

By Jonathan Underhill

Aug. 13 (BusinessDesk) - Fonterra Cooperative Group's credit ratings were put on CreditWatch with negative implications by Standard & Poor's, which said there was a risk of weakness in the dairy exporter's financial metrics given its high debt levels at a low point in the global price cycle.

The Auckland-based company has 'A' long-term and 'A-1' short-term ratings with S&P, which were put on CreditWatch following its announcement of a lower forecast milk price due to weak demand and surplus supply in the global dairy market.

"This ongoing weakness in the global dairy market has occurred when Fonterra's debt is at very high levels due to a large acquisition and peak capital expenditure, placing downward pressure on Fonterra's key financial metrics," said Standard & Poor's credit analyst Brenda Wardlaw.

While Fonterra's ability to lower the price it will pay for milk demonstrated the company's "superior financial flexibility, the likely weakness in its key financial metrics in the short term may place downward pressure on the credit ratings on the company," Warlaw said.

That would be tempered by Fonterra's decision to cut capital spending by between $500 million and $600 million compared to 2015, "however, 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."

Wardlaw said Fonterra's offer of interest-free loans to suppliers of up to 50 cents per kilogram of milksolids "implies there may be limited headroom to lower the payout at the bottom of the global price cycle." Still, the payments would be phased in and S&P expects Fonterra to "conservatively manage the level of advance payments, loans to farmers, and dividends during this challenging period."

She said S&P expected to resolve the CreditWatch following a review of Fonterra's 2015 financial results.

“Fonterra has taken proactive and positive steps to maintain the financial strength of the Co-op. We have continued to exercise financial prudence and discipline in challenging times for dairy globally,” chief financial officer Lukas Paravicini said. They included the cut to spending, a "prudent" advance rate for farmers this season and cost savings, he said.

Units in the Fonterra Shareholders' Fund fell 0.4 percent to $4.80.


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