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Fitch has revised its rating outlook for Fonterra to negative from stable but reaffirmed the long term default rating as ‘A’.
The revision follows Fonterra’s reduction of its forecast earnings for the year ending July 2019.
“In our view this indicates that the cooperative has structural issues it needs to address to retain the defensive traits that have underscored its historically strong business profile,” Fitch says.
The cooperative’s current review will be crucial in this, it says.
Fitch says it “is positive for bondholders” that Fonterra has said it will not pay an interim dividend, that any decisions on full-year dividend will be made at the end of the financial year and that its dividend policy is under review.
This “continues to reinforce Fitch’s expectation that Fonterra will prioritise the strength of its balance sheet overpayment to farmer shareholders”.
Regarding structural issues, Fitch says “the effect that volatility in the dairy market and other industry issues in specific geographic regions continue to have on Fonterra’s profits indicates there are structural issues within the cooperative, which limit its ability to absorb these effects”.
Fitch says the cooperative is committed to reducing leverage and reviewing its portfolio.
“We believe asset sales are critical for Fonterra to return its metrics to a level in line with its current rating, given the impact the structural issues continue to have on Fonterra’s ability to organically deleverage.”
Any delay in the expected $800 million asset sales will put pressure on Fonterra’s rating.
Fitch notes Fonterra is a world leader in dairy exports representing about 15% in the global market including a 42% share in whole milk powder.
And it is New Zealand’s largest dairy producer collecting 82% of the country’s milk supply in the 2017-18 season. – Pam Tipa
In a follow-up to this old mutt’s piece two issues ago about Fonterra directors getting to grips with the co-op’s financial state and loudly sharing their dismay in the Koru club, another of the Hound’s spies has passed on more news in the ‘Fonterra director watch’ category.
Fonterra says there’s an urgent need to improve return on capital invested in the co-op by farmers and unit holders.
Fonterra has taken a $126 million hit over the sale of its stake in Venezuelan consumer joint venture, Corporacion Inlaca.
Fonterra is pulling out of a European joint venture as part of its portfolio review following last year’s disastrous financial results.
Fonterra says it has returned to profitability with a net profit of $80m for the first half of the 2019 financial year.
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