The downgrading of Tesco's debt to "junk" status could limit its negotiating power on potential asset sales as Britain's biggest retailer embarks on the long-awaited recovery plan designed to reverse its sliding fortunes.
Tesco's shares yesterday had risen as much as 15% in their biggest one-day gain since 1988 after the grocer reported much better than expected Christmas trading.
Its new boss Dave Lewis also detailed plans to slash costs and sell assets to fund lower prices and recover lost market share.
However, the shine was taken off Tesco's day when, after the stock market closed, ratings agency Moody's downgraded the company's debt to non-investment grade, or junk, on expectations that profits will remain challenged by changes in the British grocery market.
The move marks another fall from grace for Britain's biggest private employer, a staple of British pension funds that was rated A1 by Moody's in 2008. Tesco is still reeling from an accounting scandal and issued four profit warnings last year.
Tesco's debt at the half-year stood at £7.5 billion and of its outstanding liabilities, it faces peak repayments in 2016, 2017 and 2019.
The company said yesterday that it had appointed Goldman Sachs to explore options for data-gathering business Dunnhumby, which could include a stock market flotation or a sale.
Some analysts say that Tesco may also need to sell or spin off assets in Asia or eastern Europe to raise cash, though Lewis said there was no need for a fire sale.
He also emphasised that Tesco's liquidity and funding were "very secure", noting that one of his first moves when he became CEO last September was to establish a £5 billion credit facility.
Moody’s said that Tesco could return to an investment grade rating if its operating performance recovered in the UK, with like-for-like sales increasing and its trading margin improving to at least 3%.
The ratings agency said Tesco would also need to continue strengthening its corporate governance and demonstrate a commitment to a conservative financial policy, with an adjusted debt-to-core earnings ratio of 4.5 times or below.
Other 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.
