Under financial markets rules it has made a pre-issue announcement of its intention.
It would sell the bonds, expected to mature in October 2021, to NZ institutional and retail investors and the proceeds would be for general corporate purposes.
Fonterra has just repaid $300m of bonds issued in early 2009 after it got into some financial difficulties through the Global Financial Crisis and related commodities price collapse, which had a coupon (or interest) rate of 7.75%.
Forsyth Barr head of fixed interest Max Brown suggested the new bonds might sell in the range of 4.3% to 4.5% in the current interest rate environment for similarly-rated securities.
He said Fonterra had some technical issues to do with the interim reporting date (March 25) which prevented it from offering the 2009 bond holders roll-over participation in the newly foreshadowed offer.
An existing bonds issuer would usually replace one series with another opportunity and changes in regulations had made that easier, he said.
Market interest in the new bond would be keen and there would be plenty of willing investors.
Brown was asked why Fonterra would use the bond market for a relatively small amount when it had $3 billion of “undrawn committed facilities” according to the 2014 annual report.
He said it was prudent treasury management for large companies to have a diversified funding base across all potential sources, as Fonterra’s 2009 history showed.
“Banks are great mates right up until you actually want the money,” he said.
“When you need it seems to be the time they don’t want to give it to you.”
Because Fonterra now had only two smaller debt market instruments – $150m of bonds maturing in March 2016 and $35m of perpetual notes – it could be that it was under-using the fund-raising opportunity.
Brown said there was a reluctance or perhaps ignorance among company directors to make more use of the bond market.
“Large NZ companies tend to over-rely on bank funding and it wasn’t that long ago (2009) that many of them got a fright.”
Fonterra had a high credit rating second only to banks and state-owned enterprises.
Standard and Poors recently affirmed Fonterra's A and A-1 credit ratings with a stable outlook.
The interim report contained details of Fonterra’s large capital spending programme, on more peak milk processing facilities here and further investment in farms and a joint venture in China, which resulted in a debt increase from 45% to 51% (debt to debt-plus-equity ratio).
It had $18.8b of total assets at January 31 and $12.4b of liabilities. Net assets were $6.4b, down $240m from the position on January 31, 2014.
It had total borrowings of $7.5b, which were up $1.5b from 12 months previously.
Meanwhile, chairman John Wilson disclosed the make-over of RD1 branded farm servicing centres and existing road tankers to Farm Source would be suspended in the current financial environment.
Four new stores would be Farm Source branded but the changes to 67 RD1 stores would wait until there was some discretionary income to spend.
When the Farm Source concept of branding and products was launched in Methven last September Wilson said the rebranding would take place in the “normal replacement and rejuvenation process”.
For example, $30m to $40m a year was spent on the tanker fleet, he said.
