By Jonathan Underhill
Fonterra Co-operative Group's long-term credit rating was cut by Standard & Poor's, which said its peak capital expenditure and rising debt levels had coincided with a high level of volatility in the global dairy market in fiscal 2015, weakening its financial risk profile.
Fonterra's long-term rating was cut one notch to A-, while its short-term rating was lowered to A-2 from A-1. The outlook is stable.
The co-operative's cash interest costs on funding rose $95 million to $427M in the year ended July 31, reflecting advance payments to farmers, funding for the $755m purchase of 18.8 percent of Shenzen-listed Beingmate Baby & Child Food Co, and its three-year, $2.1 billion investment programme to increase and update production capacity.
Fonterra's leverage has increased as a result, with the debt-to-equity ratio rising to 49.7 percent, from 42.3 percent last year.
"The downgrades reflect our view that Fonterra's financial risk profile has weakened in the past two years, as the company's peak capital expenditure and sizable debt funded acquisition coincided with a high level of volatility in the global dairy market," S&P said.
Fonterra said in a statement that the downgrade wouldn't affect its strategy or farmer shareholder payout.
"We are progressing well with our business transformation and this will further strengthen our financial position," said chief financial officer Lukas Paravicini.
S&P said it acknowledged the recent recovery in dairy prices, and "together with reducing capital expenditure, better working capital flows, and likely transformation benefits should meaningfully improve the group's financial risk profile in the next one-to-two years."
Still, S&P expects the group's financial risk profile to remain more consistent with the 'A-' rating in the next few years, particularly given the potential for further volatility in the global dairy market."