Thursday, March 28, 2024

Bond issue raises extra $100m

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Fonterra has raised $350 million on the bond market at an interest rate considerably lower than the matured debt instrument it replaced. The interest rate for a six-year bond issue of $250m plus $100m of oversubscriptions was fixed at 4.33%, being 3.58% base rate plus a 0.75% premium.
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Fonterra’s previous six-year bonds, which matured and were paid back last month, carried a coupon (or interest) rate of 7.75%.

What will now be known as the 2021 bonds were expected to be quoted on the NZX Debt Market, enabling them to be traded by the bond holders.

The market would depend on the relative attractiveness of the coupon rate compared with prevailing available interest rates and the high security status that stemmed from Fonterra’s good credit rating.

Security and tradability underpinned the bond market for investors compared with term deposits in the banking system.

Fonterra, for its part, had diversified some of its debt needs away from trading banks, Forsyth Barr head of fixed interest Max Brown said.

“It is prudent treasury management for large companies to have a diversified funding base across all potential sources.” 

Book-building for $250m of bonds completed over two days and attracting $100m in over-subscriptions showed the willingness of mainly institutional and some retail investors to get into long-term, secure positions and have tradability if needed.

Brown said Fonterra’s good credit rating put it in corporate bond indices, more or less obliging fund managers to include Fonterra bonds in their portfolios.

Access to the bond was not scaled back for retail investors, indicating Fonterra had raised “at the limit for that margin (0.75%)”.

The whole business of announcing a $250m need and accepting an additional $100m was to avoid saying it wanted $350m but falling short, “which is not a good look”.

Fonterra did not pay any brokerage to encourage financial advisers, who would need to charge their clients and not the company for any bond arrangements entered into.

“Back in 2009 Fonterra really needed the bond money and they paid brokerage but now they figure they don’t need to,” Brown said.

“Farmers will be pleased Fonterra is holding on to every last cent during this exercise.”

“Farmers will be pleased Fonterra is holding on to every last cent during this exercise.”

MAX BROWN

Forsyth Barr

Fonterra said it would use the money raised for general business purposes.

It has announced a capital spending programme of $1.6 billion, including more peak-milk processing facilities in NZ, more dairy farms in China and the purchase of 18.8% of Beingmate, a Chinese dairy company, for an estimated $700m.

Meanwhile, Fonterra has struck the Dividend Reinvestment Plan (DRP) share and unit price for the 2014-15 interim dividend.

The price is $5.263, at which shareholders and investors who elected to join the DRP would be issued shares or fund units respectively for all or part of their proceeds from the 10c dividend.

Expressed another way, the interim dividends payable on slightly more than 50 existing shares or units will buy one more.

Shareholders and investors had to nominate their preferences for joining the DRP well in advance of the interim results announcement on March 25.

Subsequently, Fonterra reduced the dividend guidance for the full year to 20-30c and the share and unit prices on the sharemarket fell considerably, meaning those in the DRP will get more for their money.

The $5.263 strike price was determined by the average closing price on the market between April 8 and 14, discounted by Fonterra directors by 2.5% as an encouragement to use the DRP.

All dividends voluntarily put into the DRP were in effect more capital raised by Fonterra and one measure of the confidence shareholders and investors have in the company.

Fonterra will make an announcement to the sharemarket on the uptake of the DRP and therefore the number of new shares to be issued, next week.

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