Fonterra's credit rating has taken a hit following the
announcement of its proposed partnership with a Chinese
infant food manufacturer.
Credit rating agency Standard and Poor's has lowered the
dairy co-operative's long-term rating from A+ to A and
affirmed its short-term rating of A-1.
Last week, Fonterra said it was forming a global partnership
with Beingmate to help meet China's growing demand for infant
Fonterra's proposed sizable shareholding in a commercial
company operating in China indicated a financial risk
appetite that was ''more aggressive'' than Standard and
Poor's had factored into the previous rating, credit analyst
Brenda Wardlaw said in a statement.
Fonterra will issue a partial tender offer to gain up to a
20% stake in Beingmate, with its investment in the
partnership worth $615 million.
After gaining regulatory approvals, the companies would set
up a joint venture to buy Fonterra's Darnum plant in
Australia, and establish a distribution setup to sell
Fonterra's Anmum brand in China.
Fonterra has also announced a $555 million investment in
plant expansion and optimisation in New Zealand.
Standard and Poor's acknowledged the sourcing of product for
distribution via the partnership from New Zealand milk meant
the pricing flexibility afforded through subordination would
not be affected.
However, the scale of the proposed acquisition, a reliance on
dividends from the equity holding, higher leverage in the
short-term from the transaction, and the capital expenditure,
worsened Fonterra's credit quality to A.
Meanwhile, Fitch Ratings has affirmed Fonterra's long-term
rating at AA-.