Fonterra capital plan leaves Fitch unmoved

Friday 18th September 2009

Capital restructuring plans announced by the New Zealand dairy cooperative, Fonterra, will have no impact on its AA- credit rating, despite improving the business's ability to manage risk of share redemptions by farmer members in bad years, says the Fitch Ratings agency.

The first two elements of the restructuring plan - allowing farmers to buy equity equivalent to 120% of their on-farm milk production, and reforming the Fair Value Share calculation to account for the fact that only farmer-members can hold Fonterra shares - were positive, Fitch said.

While there would now be incentives created to hold rather than redeem shares, and to sell over-production to other milk processors rather than Fonterra in bad years, the dilution effect was "minimal (estimated at between NZD0.01-NZD0.02) and is considered unlikely to materially impact Fonterra's share of total milk collection".

"However the proposed changes do not increase the level of subordination to other creditors nor significantly increase Fonterra's ability to raise equity capital, both of which are fundamental to Fonterra's rating," Fitch said.

Businesswire.co.nz

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