Focus Live: Scathing Report: S&P Says Fonterra has lost its way. Video / Leon Menzies
Fonterra had "lost its way" over the past seven years and governance factors had contributed to a "widespread misallocation of capital", ratings agency S&P Global says.
This comes as Fonterra prepares to unveil a new strategy at its annual result due later this month, which is expected to include costcutting measures and potential job losses.
S&P credit analyst Graeme Ferguson said in a report that the co-op did have a "credible deleveraging plan" and that its strategic review would result in the more disciplined allocation of capital.
S&P Global Ratings lowered its Fonterra rating twice in recent years.
The first was in August 2014 and the second in October 2015.
"While each downgrade was precipitated by discrete events, the common undercurrent was the cooperative's ambitious capital investment program that sought to grow Fonterra beyond its core function of collecting, processing, and selling New Zealand milk," Ferguson said.
Nevertheless, Fonterra's divestment of noncore or underperforming assets should promote earnings stability with proceeds applied to reduce debt.
Lower capital expenditure and more stable working capital would also help repair the balance sheet, he said.
"In addition, we believe the co-operative has made good progress in restructuring its operating cost base and is committed to better transparency, forecasting, and performance monitoring," he said.
Ferguson also said Fonterra's co-operative structure introduced an additional layer of complexity to its governance.
"In our opinion, governance factors contributed to the widespread misallocation of capital.
"Management and board face intense scrutiny over their performance, and the cooperative's current financial position has drawn strong criticism from sections of its shareholder farmer base and unit holders," Ferguson noted.
Jobs on the line
Separately, Fonterra said its new strategy may involve job losses.
In last week's announcement, Fonterra confirmed that it expects to report a loss of $590-675 million for the year, equivalent to 37-42 cent loss per share.
It also noted the numbers were subject to the board reviewing the full financial statements and to audit adjustments, and reflect the values attributable to equity holders.
Fonterra and auditor PwC are "working constructively" through the normal financial year-end accounts and auditing process, it said then.
"However, due to the significant accounting adjustments in FY19, as set out in the announcement on 12 August 2019, more time is required to complete the audited financial statements," it said.
Colin Armer is Fonterra's largest farmer-shareholder and has made a complaint to the Financial Markets Authority over the company's recent financial forecasts and asset writedowns. Photo/Alan Gibson
On August 12, chief executive Miles Hurrell said that, after a full review of the business during the past year, it had become clear that Fonterra needed to reduce the carrying value of several of its assets. That, and other one-off accounting adjustments, would total $820-860m.
