Credit rating agency Fitch says Fonterra is a strong, profitable business which will experience "a few bumps in the road" in the next couple of years but is showing positive signs of reprioritising its balance sheet.
Fitch did not further cut Fonterra's credit rating after last week's profit downgrade in the third quarter financial results - the second downgrade this year - but said asset sales to reduce its leverage had become more important.
Fitch downgraded the credit rating of New Zealand's biggest company to "A negative" in early March after a profit downgrade announced in the half-year results.
The rating cut was the second in recent years. In 2015 it downgraded Fonterra to "A with stable outlook" from "AA minus stable".
Fitch director, South East Asian Industrials, Kelly Amato said Fitch didn't take any action on Fonterra's profit downgrade last week but "we see asset sales as really important in helping them get their balance sheet back to a level which is commensurate with their rating".
The $380 million sale of icecream subsidiary Tip Top put Fonterra "almost 50 per cent of the way" to its announced target of $800m debt reduction this financial year, she said.
"This provides us with a little bit of comfort that asset sales are progressing well and they are actually serious to make sure the balance sheet and overall strategy comes back to being a premier New Zealand dairy producer."
Fitch would monitor Fonterra over the next 18 months to "make sure they are moving in line with what they said they were going to do and that they are delivering".
While Fonterra had again revised down its forecast earnings, its messaging last week about its strategic business review was important, Amato said.
Fitch didn't further downgrade Fonterra's credit rating, but it did issue a statement underlining that asset sales had assumed greater significance.
Overall, Fitch liked the announcement the company was reviewing ownership of its seven wholly-owned, loss-making China dairy farms, and its joint venture in Brazil with Dairy Partners Americas. Also positive was that it was selling its Dennington processing site in Australia.
"We can see they really are going through reviews and are very serious about identifying parts of the business that aren't commensurate with where they see Fonterra in the future."
"For us that's great - it's the overall messaging (that's important)."
While there was no guarantee of a sale of the China farms, the fact the business was being reviewed indicated it had been identified as not strategic to where Fonterra was headed, she said.
Fonterra had communicated to Fitch that the target $800m debt reduction would come from asset sales.
In rating Fonterra, Fitch looked not just at debt but its profitability in terms of its ability to service debt, Amato said.
So how is Fonterra doing on that score?
"Really well. An "A" rating for a corporate is a very high rating.
"Yes Fonterra has been having a couple of issues over the past couple of years but there are a lot of inherent defensive traits within their profitability which on the whole usually tend to stand up.....we see them as a strong profitable company.
"We do understand that as they do the strategic review there will be a few bumps in the road - a few one-off expenses, a few things that will impact their profitability in the next year or two.
"But underlying everything, there is a really good business there."
Fonterra last year posted a first-ever annual loss - of $196m - and debt of $6.2 billion.
Also last year it appointed a new chief executive and a new chairman.
Amato said Fonterra's strengths were its ability to collect 80 per cent of New Zealand milk, that it was well-regarded throughout the world as having a good product, and that there was an embedded margin in the company's ability to set the farmgate milk price under law (Dairy Industry Restructuring Act).
Fitch also kept an eye on Fonterra's annual milk market share of milk collection and emerging competition, she said.
"They have enough milk which is commensurate with their processing capacity which is also fundamental to profitability."
Amato said Fitch talked to Fonterra's financial managers every month or two.
"We have a very good dialogue with them."
In the past couple of years the company had made an effort to improve transparency about product stream returns and how different factors affected them, she said.
Amato has been covering Fonterra since 2015.
"When I first started looking at them they doing an expansion programme. They wanted to source milk globally, trying for economies of scale. But (now) they're really becoming more New Zealand-focused and making sure everything in their business encapsulates and reflects themselves as the premiere New Zealand dairy producer."
Amato said for her, the biggest risk about Fonterra right now was ensuring it implemented the strategic review.
"I'm looking for risk around implementing (that) and making sure it continues to do that effectively and is able to implement everything they say they will do and see it out over the long haul and get the business back to where they said.
"That's the biggest risk for me but as long as management stay dedicated to it and people can see the benefits then we do expect them to see it out fully and get that profitability back to where we've seen."