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Fonterra's S&P global ratings are not affected by the group’s lower earnings forecasts for the year ending July 31, 2018.
Fonterra increased the milk price for the current season and now expects to be outside its target end-of-year gearing range of 40%-45%. S&P said in a note it expected Fonterra’s debt to operating profit to breach the downward threshold of four times for the 2018 financial year.
Fonterra had very limited financial headroom within the current rating.
"That said, we believe the group remains committed to retaining the ‘A-’ long-term credit rating and has a number of levers to manage debt levels"
The group announced a further reduction in its full-year dividend range from 25c-30c to 15c-20c. In addition, Fonterra had not increased its advance rate for higher milk prices, S&P said.
Fonterra’s credit metrics for 2019 were expected to return "comfortably" within the key rating tolerance of debt to profit. Rapid increases in milk prices late in the financial year had increased input costs and working capital demands, particularly inventory.
"This dynamic should reverse somewhat during fiscal 2019. We also expect the group to closely manage its capital expenditure, improve the efficiency of its existing assets, and maintain a prudent approach to shareholder returns."
Milk supply depended on the financial health of Fonterra’s shareholder farmers. The higher payout to farmer shareholders should relieve some of the financial stress experienced by farmers over the past few years, S&P said.
In the 2019 financial year, Fonterra’s balance sheet was likely to benefit from receipt of about NZ$185 million in farmer loan repayments.
Fonterra’s debt levels increased by NZ$232 million due to costs associated with the arbitration with Danone. The ratings agency noted sustained competition in greater China’s food service market and further constraints in some Asian markets had limited Fonterra’s ability to pass through higher input costs.