Tesco’s corporate credit ratings have been cut to junk status by Standard & Poor’s, following Moody’s action last week.
S&P announced today that Tesco’s long term credit rating has been cut to ‘BB+’ from ‘BBB-‘, stripping the retailer of its investment grade ratings.
S&P explained: “Given the structural changes and competitive pressures that Tesco is facing in the U.K. market, the credit supportive financial policy measures announced by Tesco’s management are unlikely to sufficiently improve the group’s financial risk profile to maintain an investment-grade rating.”
The ratings agency added that the dividend cancellation, cuts to future capital expenditure, and potential disposal of Dunnhumby should enable Tesco to improve its cash position by more than £3bn over the next financial year.
However, it added: “At the same time, however, we expect market conditions to remain highly competitive for retailers, particularly in the UK, which accounts for about two-thirds of Tesco’s retail sales and profits… Accordingly, we anticipate that Tesco’s profitability will continue to remain under pressure as market competition in the UK remains high.”
S&P said Tesco’s long-term rating was now stable, but warned it could downgrade Tesco again if “management fails to reduce debt through financial policy measures within the next financial year”.
The rating action mirrors the downgrade issued by Moody’s last week, which cut Tesco’s rating one notch from its lowest investment grade rating.
The third major rating agency, Fitch Ratings, said last Thursday that Tesco’s trading update “indicates a desire to protect sales volumes and market share, which will weaken profitability in the short term”.
However, Fitch added that its cost-cutting and disposal plans reinforced its expectation that the group will use available strategic options to restore credit metrics to a level appropriate for its current ‘BBB-’ rating.