Risks seen for Fonterra

By Felicity Anderson, Nzoom.com Business News Editor

Wednesday 17th October 2001

Fonterra, New Zealand's biggest company formally birthed on Tuesday, has been given a top credit rating by global ratings agency Standard & Poor's - with cautionary riders.

Fonterra Cooperative Group has been assigned AA-/A-1+ ratings, and its outlook described as stable.

S&P's says the ratings reflects Fonterra's flexibility in price setting, including the effective subordination of payments to supplier shareholders to other creditor payments, as well as its globally competitive cost position and strong global trade position.

But it cautions that offsetting those strengths is the future loss of single desk-seller status for exports with the dismantling of the Dairy Board legislation, its increasing investment in higher credit risk entities and integration risks.

Brenda Wardlaw, Associate Director, Corporate & Infrastructure Finance Ratings, says New Zealand's dairy export market will open to competition and that over time may weaken Fonterra's business risk position.

Wardlaw also says while Fonterra has forecast integration benefits of more than $300 million per year by the third year after the merger; the potential for integration risks also is a key credit factor.

"Fonterra's growth strategy may see its financial flexibility weaken over time if the proportion of business benefiting from subordinated payments is reduced, if growth is significantly debt financed, or if investment is in higher credit risk entities," Wardlaw says.

Full details of the planned alliance with Nestlé in the Americas will be reviewed if the alliance proceeds, she says.

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