Without a plan, junk status looms for Britain's Tesco: Moody's

Fri Oct 31, 2014 10:38am EDT
 
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By Kate Holton

LONDON (Reuters) - Tesco (TSCO.L: Quote) could see its debt downgraded to "junk" status unless it outlines plans to cut borrowing and improve trading, rating agency Moody's said, raising the prospect of higher financing costs for Britain's biggest grocer.

Tesco, already facing a severe slowdown in sales in its stores, said last month it had uncovered what has become a 263 million pound ($420 million) accounting hole, resulting in the suspension of eight senior members of staff and a Serious Fraud Office investigation.

Moody's has already cut the supermarket group to one notch above junk, Baa3, and last week also put it on review for a further downgrade after first-half results showed the pension deficit and net debt growing, while trading profits slumped.

The agency urged the group to lay out its plans or face further cuts -- a warning to newly appointed Tesco Chief Executive Dave Lewis who said last week investors should not expect a big strategy announcement.

"We expect to have a much better idea of the management's strategy within three months," Sven Reinke, the agency's lead analyst on Tesco, told Reuters.

"There are a few big decisions to make -- their strategy to turn around operations, what happens to the final dividend, the speculation about possible disposals and capital measures. Those things can't just happen without anyone noticing so we would expect a material announcement at some stage."

The prospect of a downgrade to non-investment grade, or junk, would mark a fall from grace for Britain's biggest private employer, a staple of British pension funds which was rated A1 by Moody's in 2008.

It could also prompt many investors to sell, as some funds cannot hold debt rated below investment grade.   Continued...

 
A Tesco sign is seen outside a store in south London October 23, 2014. 
REUTERS/Stefan Wermuth