Tesco bonds widen as investors fear downgrade

By Robert Smith

LONDON, Jan 8 (IFR) - Tesco (Xetra: 852647 - news) 's bonds sold off on Thursday morning, in sharp contrast to its soaring shares, as fears spread that the UK supermarket group may not have done enough to stave off a rating downgrade.

New (KOSDAQ: 160550.KQ - news) boss Dave Lewis outlined a new strategy in a statement on Thursday morning, unveiling plans to cut hundreds of millions of pounds of costs and sell assets to fund lower prices in response to the biggest crisis in its 95-year history.

The company's shares were up more 9% by mid-morning, buoyed also by improved Christmas trading numbers. But its bonds saw 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, according to Tradeweb prices at 0815 GMT.

It has since recovered, however, bid at 217bp by 1005 GMT, around 16bp wider.

"My jaw dropped when I saw just how much the bonds had widened," said one investor at a large UK asset manager.

"There were no rabbits pulled out of the hat today, for example a rights issue to defend its investment grade ratings, and they are now vulnerable to being junked."

The supermarket is rated on the lowest rung of investment grade at Baa3/BBB-/BBB- by all three major ratings agencies - Moody's, S&P and Fitch.

Moody's has its rating under review for a downgrade, and several investors said they felt today's announcement was not enough to appease the rating agency.

"There is a rumour circulating that they will be downgraded following the investor call, as they haven't sold their foreign businesses," said one high-yield bond investor.

Tesco's investor call is scheduled for 1130 GMT.

While a rights issue would have bolstered the company's credit profile, earlier rumours that management were considering that as an option spooked equity investors.

"The company is not taking the tough medicine that creditors had hoped for, while clearly no announcement of a rights issue is a major relief for equity holders," said a second high-yield investor.

"Clear the decks; there could be a lot of paper coming into the high-yield market." (Reporting by Robert Smith, editing by Helene Durand, Julian Baker)