KEY POINTS:
New Zealand's largest exporter and its largest non-bank foreign borrower, Fonterra, has revealed the scale of its debt problem by announcing a major strategic turnaround that will anger contract milk suppliers, but could provide NZ$300 million worth of equity injections over the next three years.
Fonterra announced late
yesterday it would stop its farmer owners who want to become contract milk suppliers from selling shares back to the dairy cooperative because it wants to preserve cash and reduce debt. It said it would also force them to buy back into the co-operative over the next three years to boost its capital position. These suppliers currently produce 4 per cent of Fonterra's milk and would have to buy back another NZ$300 million worth of shares to become fully fledged cooperative members again.
The move comes on top of the retention of NZ$277 million worth of milk payout in the just completed financial year as the dairy cooperative scrambles to push its debt gearing of 57 per cent back into its 45-55 per cent target band. Fonterra also said it was looking at other options to improve its gearing. It did not specify these options but they would have to include further payout retentions or asset sales.
Fonterra is heavily exposed to the turmoil on international credit markets. Its latest accounts show it had NZ$1.6 billion of commercial paper and NZ$3.167 billion of medium term notes on issue at July 31. Those accounts also show Fonterra has NZ$1.16 billion of debt that has to be rolled over every 3 months. Markets have been frozen for nearly two months and are only now beginning to thaw. Fonterra has a further NZ$1.3 billion of debt that matures within 3 months to 12 months.
Fonterra Chairman Henry van der Heyden said the changes to the terms of contract milk supply for next season were "necessary and recognise the absolute priority the Fonterra Board places on protecting the interests of our farmer-shareholders, who make up 96 per cent of our supply base". Contract milk will be available only to 'growth milk' from existing farmers or new milk from conversions, he said.
"Shareholders will not be able to surrender, or cash-up, shares to supply on contract," van der Heyden said, adding that the contract milk price would be set at 10 cents below the regular milk price in 2009/10.
Fonterra said it would require all milk to be fully share-backed within three seasons, which require farmers to hold shares equivalent to their milk supply and for any increases in their production over time. The contract price for the current season is 2 cents below the Milk Price. "In a tightening credit market, this is about protecting our shareholders from the risk of a significant expansion of contract supply and the resulting surrender of shares," van der Heyden said.
"While we need to encourage new milk into the Co-operative and growth from our existing farmers, in the current environment too much milk not backed by share capital will, over time, weaken our balance sheet and place an unnecessary financial burden on Fonterra's capital structure."
Fonterra had been refinancing portions of its debt "and was looking at other prudent avenues to make sure Fonterra's balance sheet is suitably protected."
- INTEREST.CO.NZ