Top 10 at 10: Fonterra's mounting debts; Brown humiliated; bond auction failures; Obama's 'road to hell'

Here's my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below. I also thank those emailing me suggested links to bernard.hickey@interest.co.nz. Fonterra's mounting debt problems Here's an interesting analysis of Fonterra's half year results this week over at AgProdEcon. It rightly ignores the profit and loss statement where it is difficult to compare apples with apples because of a change in the balance date. But the balance sheet is a useful indicator of what's happening. Essentially it shows Fonterra has a big debt problem. It's net cashflow has collapsed and more than NZ$1 billion of equity has been wiped out in the last year. It's debt has risen NZ$4 billion in the space of 6 months. Here are the key stats I've pulled from Fonterra's accounts filed with the NZX:

• Inventories are up to NZ$5.095 billion by January 31 from NZ$3.288 billion at the end of July last year and NZ$4.0327 at the end of November 2007.
• Non current borrowings rose to NZ$6.209 billion from NZ$4.502 billion at the end of July last year and NZ$3.580 billion at the end of November 2007
• Total liabilities rose to NZ$14.170 billion from NZ$10.170 billion at the end of July last year and NZ$11.108 billion at the end of November 2007.
• The value of Fonterra shares has dropped to NZ$4.392 billion from NZ$4.769 billion at the end of November 2007, but is up from NZ$4.297 billion at the end of July last year.
• Total equity has dropped to NZ$3.790 billion from NZ$4.996 billion at the end of November 2007.
• Fonterra's debt to debt plus equity ratio has risen to 79% from 69% in the last 14 months.
• Fonterra's net cash flow in the six months to January 31 fell to NZ$111 million from NZ$818 million in the previous corresponding half year.

Here's what Fonterra said in its press release on Tuesday to answer the inevitable question about turning around this blowout in its debt and its net cashflow issues.

Debt gearing is expected to reduce to more normal levels by year-end as working capital requirements ease due to the normal seasonal cycle and with other initiatives such as a freeze on non-essential capital expenditure. Additionally, the requirement announced last October that farmers must bring their shareholdings fully in line with this season's milk production is expected to bring in around NZ$400 million of additional equity by the end of the financial year offsetting forecast share redemptions.

And here's its reason why the net cashflow fell so much.

The higher-than-usual advance rate percentage Fonterra has been paying farmer-shareholders this season, which resulted in more than $700 million extra in payments to farmers over and above the normal payment schedule.

I am scheduled to interview Fonterra Chairman Henry van der Heyden at 3.15pm today. My obvious questions are:

• Can the contract supplier farmers afford to stump up NZ$400 million to buy Fonterra shares in a hurry and who might finance them?
• What is happening with all these inventories and how long before the milk powder stored in warehouses up and down the country go off?
• Should these accounts for the year to January 31 have been disclosed to bond investors before it completed a blockbuster NZ$800 million bond issue on February 5?
• Will Fonterra have to retain some of its NZ$5.10/kg payout to rebuild its balance sheet?
• Will Fonterra be forced to bring in an outside large corporate shareholder to boost its equity and reduce its gearing?
• Will Fonterra be forced to ask for a government bailout?

I welcome any suggestions for other questions. Gordon Brown excoriated in parliament A little known British MP in the European Parliament called Daniel Hannan is absolutely brilliant here in a scathing speech to Gordon Brown's face in the European Parliament. He accuses Brown of lying to the public, of running unsustainable budget deficits and loading a huge burden of debt on each British child. Well worth watching if only for the delicious theatre of it all. Did you check you turned off the oven? It's reassuring that not only the small guys are worried about whether the cash will be in the bank in the morning. The head of Exxon Mobil says he makes sure every day that the oil giant's US$40 billion cash pile is safe. Here's a taste of what CEO Rex Tillerson said on Bloomberg.

"Relative to the financial markets, the biggest challenge we've had is making sure all the cash is there every morning," Tillerson said in a presentation this month to investors and analysts in New York. "I tell (Treasurer) Don (Humphreys) he has to count every dollar before he goes to bed at night, and he tells me he does."

Some friendly advice for the G7 A useful letter to the leaders of the G7 ahead of their meeting in a few days from LEAP/2020. Here's a taste.

The US Dollar and economy are no longer capable of supporting the current global economic, financial and monetary order. As long as this strategic problem is not directly addressed and solved, the crisis will grow. Indeed it is at the heart of the crises of derivative financial products, banks, energy prices... and of their consequences in terms of mass unemployment and collapsing living standards. It is therefore of vital importance that this issue should be the main subject of the G20 summit

Others catch the Colin Meads disease Rugby legend Colin Meads got into all sorts of financial strife in the mid to late 1980s with currency plays. It seems others elsewhere are now seeing the same thing. Here's a taste from this nice Bloomberg story. UK faces sovereign rating downgrade after uncovered Gilt auction The UK gilt auction failure overnight has multiple implications, the biggest of which is a potential credit rating downgrade for Britain if it happens a few more times. This nice piece from the Telegraph explains why.

Failure raises fears that the Government may not be able to secure the billions of pounds its needs from the markets to fund its record fiscal deficit without paying far more for the money, and reflects concerns about UK economic stability. It comes at a highly embarrassing time for Gordon Brown, who is hosting a summit of G20 leaders next week to spearhead recovery plans for the global economy. His call for further economic stimulus packages was also called into question yesterday by Mervyn King, Governor of the Bank of England, who warned that the UK finances were so stretched the Government would be unable to launch new spending plans. Moreover, politicians have raised concerns that an uncovered gilt auction could lead to a cut in the sovereign credit rating, which could have devastating consequences for the national debt "“ due to hit a record £1 trillion - as the interest bill would soar. At a recent Treasury Select Committee hearing, Michael Fallon, the committee's deputy chairman and a Tory MP, was told by the credit rating agencies that a series of uncovered gilt auctions could be one the triggers that might lead to a change in the credit rating of a sovereign country like the UK.

Who is going to pay? John Authers at the FT.com with an excellent question: Who is going to pay for all this government spending? Barack Obama's 'Road to Hell' The outgoing European President and Czech Prime Minister, Mirek Topolanek, has described Barack Obama's 'spend and print' strategy is a 'road to hell'. Needless to say, all hell broke loose after he said and has since rowed back on it, but the grief will not end until Obama gives up the print, borrow and spend strategy.