Tesco's credit rating downgraded by Moody's

Moody’s cut the struggling supermarket’s credit rating to Baa2 from Baa1 owing to difficult conditions in the grocery market.

Tesco posted a 6% fall in its full-year trading profit and weak first quarter sales as it recorded its worst quarterly performance in 40 years this month as sales fell 3.7%.

Sven Reinke, lead analyst for Tesco at Moody’s, said: “We have downgraded Tesco’s rating owing to the increasingly difficult conditions in the UK retail grocery market.

“We expect these conditions to continue affecting the company’s credit profile negatively over the next 12-to-18 months.”

Moody’s said it would consider a further downgrade if Tesco posts a substantial profits decline in the UK or abroad, according to the Telegraph.

The ratings cut follows that by Standard & Poor in April when it changed its BBB+ rating for Tesco from “stable” to “negative” at the end of April.

In April 2012 Moody’s cut Tesco’s rating from A3 to Baa1 because of concerns over its £1bn investment drive.

City analysts said the downgrade was “not a surprise”.

Verdict lead analyst Andy Stevens said: “Tesco is still struggling – it’s a retailer in an incredibly tough market finding it difficult to turn itself around. Today’s downgrade signals diminishing confidence in the retailer and its ongoing operations.

“However, it is a hugely cash generative business and makes a large amount of profit.”

Shore Capital’s Clive Black said: “At a time when Tesco is really struggling operationally within the UK, and when the business has seen its share price materially weaken, a credit downgrade is not what they need. It feels as if the next ratings change is going to be more on the downside than the upside. Trading momentum in the first quarter was very poor, with a 4pc reduction in UK sales being especially weak.”

A Tesco spokesman said: “Moody’s announcement reflects the challenges for the sector as a whole, and the impact that they expect this is likely to have on our near-term performance.

“However, they also acknowledge we have a plan to address structural challenges in the sector and we remain the market leader both overall and in online and convenience, which are critical to future growth.”