A second international rating agency has downgraded Fonterra's creditworthiness in the space of 10 days, citing concerns of rising debt levels amid global milk price volatility.
Credit downgrades make it more expensive for Fonterra to borrow money.
Last week, Standard & Poor's (S&P) cut Fonterra's rating from A to A-minus, also on the back of debt concerns, while late on Wednesday this week, Fitch Ratings cut long-term foreign currency issuer default rating (IDR) from AA- to A and its short-term IDR was reduced from F1+ to F1, with a stable outlook.
The Fitch downgrade said Fonterra business profile had ''weakened'' and the volatility of global dairy prices had revealed its ''vulnerability to adverse business and conditions'', Fitch's report said.
Fitch noted the A rating recognised Fonterra's strong global market position, financial flexibility to adjust forecast milk prices and its advance rate milk payments to farmers.
Fonterra's chief financial officer Lukas Paravicini was quick to play down the latest downgrade, responding yesterday that Fitch's A rating category confirmed the co-operative's underlying financial strength and credit quality remain strong.
''I reiterate my comments of last week, [following the S&P downgrade] that the revised ratings will not have any impact on Fonterra's strategy or on farmer shareholder payout,'' Mr Paravicini said in his statement.
Fonterra had maintained an A rating category while progressing with a carefully planned investment strategy, which was making the co-operative stronger and positioning it well for the future, he said.
Fitch's three main concerns were Fonterra having decided not to reduce the level of advance payments during the season to farmers, given the sharp decline in global dairy prices.
There was also the higher debt load taken on by Fonterra for its $755million purchase of an 18.8% stake in Shenzen-listed Beingmate Baby & Child Food Co, and interest-free loans to farmers to assist them through the season, not repayable until the milk price payout hit $6 per kilogram.
About 70% of farmer shareholders took up the loan offer.
''While these actions support Fonterra's farmer shareholders' financial stability, they are to the potential detriment of bondholders and highlight a weakening of Fonterra's financial flexibility,'' Fitch said.
At last month's results presentation, Fonterra said its gearing ratio rose to 49.7% from 42.3% a year earlier, but was 46.4% when adjusted for a $900million advance payment to farmers, NZME. reported.
The co-op has in the past aimed for a gearing ratio of 40% to 45%.
Chief executive Theo Spierings said at the time Fonterra's debt was not where the co-op wanted it to be ''but it is close''.
Mr Paravicini said yesterday Fonterra was continuing its strong financial discipline, including capital investment management, setting a prudent advance rate payment to farmers for the current season, and applying its dividend policy to ensure an ongoing retention of a portion of earnings.
Last week's S&P downgrade reflected its view that Fonterra's risk profile had weakened in the past two years, as the company's peak capital expenditure and a sizeable debt funded acquisition - the purchase of a stake in China's Beingmate - coincided with a high level of volatility in the global dairy market, NZME reported.
S&P credit analyst Brenda Wardlaw said last week Fonterra had a high degree of financial flexibility in setting milk price forecasts, which underpinned the A category rating on the group.
BusinessDesk reported that last week, Fonterra reset the annual interest paid on its $35.1million of perpetual shares listed on the NZX's debt market to 4.94% from January 10.
The notes currently pay annual interest of 4.69%.
Fonterra's net finance costs jumped to $518million in the year ended July 31 from $366million a year earlier.
