Credit agencies Fitch and Moody's have downgraded Tesco's rating – with the latter saying it could be dropped further to junk status depending on the outcome of the ongoing investigation into its accounting practices.
Moody's has dropped the rating on Tesco from Baa2 to Baa3, while Fitch has dropped it from BBB to BBB-.
The downgrading follows today's news that the troubled supermarket had a larger-than-expected profit shortfall of £263m and chairman Sir Richard Broadbent announcing he would step down as he expressed “profound regret”.
Tesco's share price slumped nearly seven per cent today.
Moody's said Tesco's performance for the last half year meant it had lowered expectations for the next 12-18 months. While eight people have left the business as part of the investigation into its accounting irregularities, the agency said new chief executive Dave Lewis and even newer chief financial officer Alan Stewart “needs to continue to assess its financial reporting and controls”.
Tesco remains on review for a further downgrade because it is yet to reveal the outcome of its review, Moody's said.
Moody's vice president and senior analyst Sven Reinke explained:
Even if the FCA concludes its investigation without material negative financial implications, Tesco faces huge operational challenges which continue to put its investment-grade rating at risk. The ongoing review will focus on the company's strategy to stabilise the trends in its operations, and improve its overall financial profile as it adapts to fundamental shifts within its home market.The outcome of the company's strategic review of its businesses, as well as the financial policies and business practices that its new management team will employ, will be critical elements of that assessment.
There was one ray of light – Moody's said Tesco had “a sound liquidity profile that offers important financial flexibility” - but warned a “credible strategy” was vital to cope with the structural changes being experienced in the grocery sector.
Fitch meanwhile said its downgrading reflects “Tesco's continued loss of competitiveness its core UK operations, with profitability further impacted by the accounting adjustments associated with the group's recognition of commercial income”.
Its outlook has been dropped to negative, but Fitch said the outlook could be revised to stable if Tesco were “able to arrest its UK market share decline, or the erosion of profitability and debt protection ratios, as evidence of a successful strategy implementation”.
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