China deal factor in Fonterra's lower credit rating

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 formula.

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-.


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