KEY POINTS:
Fonterra chief executive Andrew Ferrier says Fonterra wants to maintain its existing credit ratings, but a major agency, Standard & Poor's, has already warned that its capital restructure may lead to a downgrade in the international ratings that get it a good deal on borrowings.
"We've taken a
path that says we want to maintain our credit ratings the way they are now," Ferrier said after the company announced a proposal to puts its assets into a listed subsidiary in a couple of years.
Assuming the proposed capital restructure and corporate listing went ahead, Fonterra would work to set up the listed company in a way that enabled it to maintain its credit rating, Ferrier said in Christchurch.
"The new Fonterra will have to have a sufficiently robust financial model to satisfy the ratings agencies," he said. "Ratings agencies are going to look at the prospects of the business, the gearing of the business ... all those factors that they take into consideration".
But even as he spoke, S&P downgraded its outlook on Fonterra to negative from stable.
As a big co-operative Fonterra has significantly benefited from the fact that its debt was ranked in a way which left its shareholder farmer-suppliers out in the cold - standing last in any potential line of creditors. Their annual milk payments are Fonterra's single biggest business cost, and in the unlikely event of the company falling over, every other debtor would be ranked ahead of the farmers.
"The flexibility afforded by the subordination of payments to milk suppliers in New Zealand is a key factor supporting Fonterra's credit quality," according to S& P credit analyst Brenda Wardlaw.
S&P 12 months ago began lowering its assessment of Fonterra Co-operative Group - initially from AA-/A-1 to A+/A-1 - after saying its business and financial risk profiles had weakened and it expected the declining trend to continue.
It also downgraded the rating on Fonterra's subordinated capital notes from A+ to A, but noted Fonterra's A+ long-term rating was still at the upper end of the range for global food companies.
The rating downgrade reflected the cumulative impact of incremental evolutionary changes in Fonterra's "risk appetite", and Wardlaw said: "Fonterra's growth strategy is likely to weaken the co-operative's financial flexibility."
- NZPA