Tesco has had its credit rating downgraded to two points above junk status by rating agency Moody’s and could face a further cut if its poor performance continues.
Yesterday Moody’s cut Tesco’s rating from Baa2 to Baa1, two weeks after the grocer reported its worst quarterly results in 40 years.
The agency cited Tesco’s 6% drop in trading profit to £3.3bn for the financial year 2013/14, published in April, and “increasingly difficult conditions in the UK retail grocery market” as reasons for the downgrade.
It also pointed towards a further potential cut in the rating, highlighting the long term challenges the retailer faces.
Moody’s lead analyst for Tesco, Sven Reinke, said: “We expect these conditions to continue affecting the company’s credit profile negatively over the next 12-18 months.”
Moody’s added it would take a “sustainable improvement in the company’s sales performance” for Tesco’s rating to be upgraded, and would require the retailer to embark on a “conservative financial policy” in the medium term.
The downgrade will heap pressure on to chief executive Philip Clarke, who has faced increasing discontent from shareholders concerned over Tesco’s performance.
Tesco’s share price plummeted on Monday morning with the announcement of the downgrade, falling more than five points from the closing position on Friday as soon as the markets opened. After an initial fall in early trading this morning, at the time of writing (June 17 at 11am) shares had returned to 288.7p, just short of yesterday’s closing position.
Earlier this month Tesco reported a 3.7% like-for-like sales decline in its first quarter results, which Clarke said was partly due to a major store refreshment programme underway at the retailer.