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UPDATE 1-S&P cuts Fonterra rating after China tie-up plan
August 29, 2014 / 6:16 AM / 3 years ago

UPDATE 1-S&P cuts Fonterra rating after China tie-up plan

(Adds comment, details)

SYDNEY/WELLINGTON, Aug 29 (Reuters) - Credit ratings agency Standard and Poor’s on Friday cut its long-term rating on dairy co-operative Fonterra , citing risks involved with the company’s plans to take a stake in a Chinese baby food and formula maker.

S&P cut its rating on the world’s largest dairy exporter to A from A+, and affirmed the A-1 short-term rating. The outlook on the long-term rating is stable.

S&P also lowered the rating on Fonterra’s subordinated notes to A- from A, and the ratings on its Chinese renminbi notes to A from A+.

The downgrades follow Fonterra’s announcement earlier this week that it planned to take a stake up of to 20 percent in China’s Beingmate, as it expands into the country’s lucrative infant formula market.

The company said it would invest a total of about $514 million in the tie-up, which would be funded through debt.

“Fonterra’s proposed sizable shareholding in a commercial company operating in China indicates a financial risk appetite that is more aggressive than what we had factored into the previous ‘A+’ rating,” S&P analysts said in a statement.

“The scale of the proposed acquisition; a reliance on dividends from the equity holding, rather than having direct control over cash flows; higher leverage in the short-term from this transaction; and the capital expenditure, worsen Fonterra’s credit quality.”

S&P said that Fonterra’s rating may come under further pressure if it took on more debt-funded investments, particularly in higher-risk geographies.

Ratings agency Fitch reaffirmed its AA- rating on the company, while also maintaining its “Stable” outlook. (Reporting by Wayne Cole and Naomi Tajitsu; Editing by Clarence Fernandez and Michael Perry)

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