Moody's cuts UK retailer Tesco to "junk"

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By Robert Smith

NEW YORK, Jan 8 (IFR) - Moody's Investors Service downgraded UK supermarket retailer Tesco (Xetra: 852647 - news) to "junk" on Thursday, the first of the three major rating agencies to do so.

Moody's cut the company's credit rating by one notch to Ba1 on expectations profits will remain challenged due to structural shifts in the UK grocery market.

Tesco bonds had already sold off sharply earlier in the day, as fears spread that the UK supermarket group had perhaps not done enough to stave off a rating downgrade.

That followed a new plan, outlined by new boss Dave Lewis, to cut hundreds of millions of pounds of costs and sell assets to fund lower prices in response to the biggest crisis in the company's 95-year history.

While Tesco shares jumped by almost 15% in European trading hours, its bonds fell victim to an all-out rout, as investors had expected more substantive action.

Tesco's largest euro bond, a EUR1.25bn 1.375% deal due 2019, widened more than 50bp to mid-swaps plus 251bp in early trade.

Tesco cut its profit forecast for the fourth time in five months in December after failing to adapt to changes in the market, such as the increased popularity of discount stores Aldi and Lidl and a boom in convenience stores and online shopping that has hit Tesco's huge out-of-town sites.

"The company's efforts to stabilise the UK operations and to protect the balance sheet, while helpful, will take time to implement," Moody's said.

"The company's financial profile is likely to remain leveraged beyond what we consider to be commensurate with an investment grade profile."

Moody's previously downgraded Tesco to the lowest investment-grade rating of Baa3 in October, and left its ratings on review for further downgrade.

Other rating agencies have also taken action.

S&P warned in December that it may also downgrade Tesco to high-yield "junk" status after placing its BBB- rating on credit watch negative.

Fitch rates Tesco at BBB- with a negative outlook. (Reporting by Natalie Harrison and Robert Smith; Editing by Marc Carnegie)