The grocer's senior long-term credit rating was lowered to BB+ from BBB-. It is unlikely to go any lower than this however, with S&P saying the outlook was stable.
Tesco's efforts to improve its cash position - such as scrapping its dividend, cost-cutting and the sale of Dunnhumby - will add more than £3bn over the next financial year, S&P said.
"We anticipate increased competitive and price pressures in the UK from both traditional and discount retailers could suppress any benefits from various management strategies oriented toward improving trading performance," it said.
S&P has followed rating agency Moody's which lowered its rating to Ba1 from Baa3 last week.