Fonterra had "lost its way" over the past seven years and governance factors had contributed to a "widespread misallocation of capital", ratings agency S&P Global says.
This comes as Fonterra prepares to unveil a new strategy at its annual result due later this month, which is expected to include cost cutting measures and potential job losses.
S&P credit analyst Graeme Ferguson said in a report that the co-op did have a "credible deleveraging plan" and that its strategic review would result in the more disciplined allocation of capital.
S&P, which rates Fonterra at A minus, said its latest report did not constitute a ratings action.
"Fonterra has a credible deleveraging plan and reasonable prospects of building a rating buffer over the next 12 to 18 months," Ferguson said.
"We expect the cooperative's strategic review to result in more disciplined allocation of capital and more robust operational performance," he said.
"Still, balance sheet repair and operating performance will remain immediate priorities for the co-operative," he said.
"In our opinion, Fonterra somewhat lost its way over the past seven years."
S&P Global Ratings lowered its Fonterra rating twice in recent years.
The first was in August 2014 and the second in October 2015.
"While each downgrade was precipitated by discrete events, the common undercurrent was the cooperative's ambitious capital investment program that sought to grow Fonterra beyond its core function of collecting, processing, and selling New Zealand milk," Ferguson said.
Nevertheless, Fonterra's divestment of noncore or underperforming assets should promote earnings stability with proceeds applied to reduce debt.
Lower capital expenditure and more stable working capital would also help repair the balance sheet, he said.
"In addition, we believe the co-operative has made good progress in restructuring its operating cost base and is committed to better transparency, forecasting, and performance monitoring," he said.
Ferguson also said Fonterra's co-operative structure introduced an additional layer of complexity to its governance.
"In our opinion, governance factors contributed to the widespread misallocation of capital.
"Management and board face intense scrutiny over their performance, and the cooperative's current financial position has drawn strong criticism from sections of its shareholder farmer base and unit holders," Ferguson noted.
Separately, Fonterra said its new strategy may involve job losses.
In a statement, a Fonterra spokeperson said: "We have been open with employees that with a new strategy comes a new structure.
"Our new strategy is about being more focused, prioritising New Zealand milk, and being closer to our customers.
"That means we will be changing our organisational structure to support our new strategy.
"It is premature to speculate on where in the organisation these changes may occur or how many roles may be impacted," the spokesperson said.
Fonterra last week postponed the release of its audited financial statements for the 2018/19 year to no later than September 30.
The company was previously slated to report its result for the July 31 this week.
In last week's announcement, Fonterra confirmed that it expects to report a loss of $590-675 million for the year, equivalent to 37-42 cent loss per share.
It also noted the numbers were subject to the board reviewing the full financial statements and to audit adjustments, and reflect the values attributable to equity holders.
Fonterra and auditor PwC are "working constructively" through the normal financial year-end accounts and auditing process, it said then.
"However, due to the significant accounting adjustments in FY19, as set out in the announcement on 12 August 2019, more time is required to complete the audited financial statements," it said.
Fonterrra has said the change in reporting date was unrelated to any discussions with the Financial Markets Authority, recent speculation about further material asset impairments, or other announcements.
The delay comes after the FMA has asked to see its books, and concerns among some of Fonterra's bigger shareholders over the reporting of the co-op's finances.
On August 12, chief executive Miles Hurrell said that, after a full review of the business during the past year, it had become clear that Fonterra needed to reduce the carrying value of several of its assets. That, and other one-off accounting adjustments, would total $820-860m.