New plan urged to avoid junk grading at Tesco

BHH and Blue Rubicon have been appointed to work on Tesco turnaround

Ratings agency Moody’s has said Tesco must either lay out its plans or suffer the risk of a further rating cut

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10 November 2014 | 0

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A plan to cut borrowing and improve trading is needed at Tesco HQ, if the grocer wishes to avoid its debt being downgraded to junk, ratings agency Moody’s has warned.

Following the grocery’s giant’s recent discovery of a £263m (€336m) accounting hole, a total of eight senior staff members have been suspended and a Serious Fraud Office investigation launched.

Tesco’s woes don’t end there though, as Moody’s has already cut the supermarket group to one rung above junk, Baa3. It has also put the company on review for a further downgrade, after first-half results showed the pension deficit and net debt were growing, while trading profits declined.

New chief executive Dave Lewis had previously said that investors should not expect a big strategy announcement. But this doesn’t appear to have cut the mustard with Moody’s, which said Tesco must either lay out its plans or suffer the risk of a further rating cut.

“We expect to have a much better idea of the management’s strategy within three months,” said Sven Reinke, the agency’s lead analyst on Tesco.

“There are a few big decisions to make – their strategy to turn around operations, what happens to the final dividend, the speculation about possible disposals and capital measures. Those things can’t just happen without anyone noticing so we would expect a material announcement at some stage.”

It’s widely speculated that the prospect of a downgrade to non-investment grade, or junk, could prompt many investors to sell up.

Commenting after Tesco’s Q2 results last month, David Gray, retail analyst at Planet Retail, said: “New CEO Dave Lewis will, without question, have to consider selling peripheral businesses like the blinkbox movie streaming service or Dobbies garden centre chain.”

 

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