Bangkok--2 Apr--Standard & Poor's
MELBOURNE (Standard & Poor's) April 2, 2015--Standard & Poor's Ratings Services said today that it had affirmed its 'A/A-1' ratings on New Zealand-based Fonterra Co-operative Group Ltd. The outlook remains stable. We also affirmed the issue ratings on all of Fonterra's debt, including the 'A' rating and 'cnAA+' Greater China regional scale rating on its Chinese renminbi notes and debt issued by its subsidiary New Zealand Milk (Australasia) Pty Ltd.
"The rating affirmation reflects our view of Fonterra's strong business position as a low cost, leading global dairy co-operative, together with the group's significant financial flexibility provided by the effective subordination of milk payments to its New Zealand supplier base," Standard & Poor's credit analyst Brenda Wardlaw said. "We consider Fonterra's "strong" business and "intermediate" financial risk profiles to be at the upper-end of their respective categories."
Our assessment of Fonterra's business risk profile reflects its globally competitive cost position and market leadership in the global trade of dairy products. Fonterra's growing global presence, accounting for around one-third of global trade in dairy products on a milk-equivalent basis, supports the company's robust competitive position in a consolidating global market for food manufacturers and retailers. Fonterra's position as the lowest-cost, large-scale, producer worldwide reflects its economies of scale arising from the volume of milk processed and modern manufacturing technology. A low-cost, year-round, pasture-based production system, combined with large-scale farming operations and productivity improvement, also underpins Fonterra's on-farm cost competitiveness.
Importantly for creditors, milk payments to Fonterra's New Zealand supplier base are effectively subordinated to payments to other creditors. Fonterra has a long-established track record of exercising its discretion over these supplier payments and through reforecasting milk prices to reflect global market conditions, both in advance of each season as well as during a season if required. In addition, it has a conservative advance policy and discretion over these advance payments and subsequent payments to these suppliers. Its low cost base underpins this flexibility regarding its key raw material. Importantly, this operational strength supports supplier retention and entrenches Fonterra's position as the leading milk supplier in the New Zealand market and globally.
Ms. Wardlaw added: "The stable rating outlook on Fonterra reflects our view that the effective subordination of the company's payments to its New Zealand supplier-shareholders remains entrenched within Fonterra's business model. Implicit within the ratings is our expectation that future investments are unlikely to materially change the proportion of milk supplied from New Zealand."
Downward pressure on the rating could occur if Fonterra: Undertakes material debt-funded transactions, particularly in higher-risk geographies; Sustains a material reduction in the proportion of milk sourced from New Zealand, thereby reducing the subordination benefit;Experiences a material and sustained decline in market share in its New Zealand supplier base; or Records significant growth in the consumer products business that materially increases the group's cost base and undermines the payment subordination flexibility of the group.
An upward rating trend is unlikely because it would require an increase in lender protection from the subordination benefit. We consider this scenario as unlikely, however, given that Fonterra's long-term growth strategy will inevitably include expansion outside its co-operative supplier base in New Zealand, in addition to organic growth in its home base.