Fonterra's credit rating with S&P Global is safe for now, but the agency's patience with the debt laden co-op is "not infinite", an S&P analyst said.
S&P Global analyst Graeme Ferguson, who this week released a report on Fonterra's restructuring, was blunt about Fonterra's shortcomings, but said he was confident it was on the right track as it seeks to sell assets, pay down debt and return to a more back to basics approach.
Fonterra still enjoys a high rating from S&P - A minus - but suffered two downgrades in 2015 and 2016.
Melbourne-based Ferguson said Fonterra's problems were not "existential" but that they would take time to sort out.
"What we are talking about at the moment is elevated levels of debt but it's not catastrophic. There is no existential threat to the co-op."
Despite a raft of bad news to hit Fonterra, he said the rating was not under threat.
"We believe that they are a reformed character, to quite a large extent," Ferguson told the Herald.
"They understand the challenges. They are not stepping back from them, and they are willing to make difficult decisions to address them," Ferguson said.
However, there would come a point when agency's patience would run out.
"Our patience is not infinite, so if we see any step back from that resolve we think the rating will come under immediate pressure, but at the moment, we believe that they have got it."
Ferguson pointed to previous occasions when the co-op had altered the milk price to accommodate the balance sheet.
"That track record gives us more comfort that it's a lever that they would be prepared to pull in the future."
Ferguson said the impending sale of its share of DFE Pharma - a joint venture Fonterra has with Friesland Campina - should have a material impact on Fonterra's debt, coming as it will after the sale of Tip Top for $380 million and the sale of its Foodspring nutrition business for a $64m premium over its book value.
While progress had been made with assets sales, Ferguson said would be "a couple of years before they are out of the woods".
But he said the basics of the co-operative - the collection, processing and selling of New Zealand milk - were still sound.
The co-op's problems had centred around the pursuit of offshore milk pools and some of - not all - the value add in New Zealand, a loss of discipline and focus.
"Fonterra's operating costs ran away while it was still wanting to reward shareholders," he said.
"If you overlay that with what can only be described as an ineffectual governance framework, that's what has caused the distress," he said.
"If they can have a more simplified strategy - perhaps less ambitious - and can stick to their knitting - that should deliver a better outcome for New Zealand farmers," he said.
"There is no emotional attachment to the past strategy. They know they have to rebuild trust with their shareholder farmers.
"They know there are a range of structural headwinds that they have to content with."
Ferguson said Fonterra had a lot of unallocated costs - corporate costs that were not associated either directly or indirectly in providing products or services for sale - around which there was a great deal of "opacity".
In his report, Ferguson said Fonterra had "lost its way" over the past seven years and governance factors had contributed to a "widespread misallocation of capital".
This comes as Fonterra prepares to unveil a new strategy at its annual result due later this month, which is expected to include cost cutting measures and potential job losses.
Fonterra is expected to report a loss of $590-675m for the year to July 31, equivalent to a 37-42 cent loss per share.