13 Aug 2015

Negative creditwatch for Fonterra

4:40 pm on 13 August 2015

A global credit ratings agency has placed Fonterra on negative creditwatch, citing weakening market conditions.

Fonterra building

The Fonterra headquarters on Princes St in central Auckland. Photo: RNZ / Kim Baker Wilson

Standard & Poor's said the creditwatch placement reflected its concerns regarding potential weakness in the dairy co-operative's finances given its high debt levels, which came at a low point in the global milk price cycle.

It said the move followed the lower forecast milk price announced by Fonterra last week due to weak demand and surplus supply in the global dairy market.

S&P said Fonterra's debt was at high levels due to a large acquisition and peak capital expenditure, placing downward pressure on its finances.

S&P has placed the co-operative's "A" long-term and "A-1" short-term ratings and its associated debt issues on CreditWatch with negative implications.

Fonterra has responded to the agency's announcement, saying it has taken proactive and positive steps to maintain the financial strength of the co-operative.

"We have continued to exercise financial prudence and discipline in challenging times for dairy globally," chief financial officer Lukas Paravicini said.

The measures included significantly reducing capital expenditure, and that it is now targeting a spend of $500 million in the 2016 financial year, which is $600 million less compared to the 2015 financial year.

Fonterra had set a prudent advance rate payment to its farmers for the current season given the ongoing volatility of global dairy prices, and the company was progressing well with its business transformation, he said.

The measures reinforced Fonterra's sound financial position "and are enabling us to provide support to our farmers during this difficult period of low global dairy prices".

Mr Paravicini said Fonterra's current debt levels were in line with expectations.

"While current global prices are unsustainably low, we take a longer term view of the cyclical nature of the international dairy market and have confidence in the fundamentals for dairy."

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