Tesco’s Bonds Slide as Accounting Probed After Inflated Forecast

Tesco Plc’s bonds fell after the biggest U.K. supermarket chain said it overstated a first-half profit estimate and suspended the head of its British business as it conducts an accounting probe.

The company’s 1.375 percent senior unsecured bonds due July 2019 dropped almost one euro cent, the most since they were sold this year, pushing the yield up by 20 basis points to 1.27 percent, according to data compiled by Bloomberg. Yields on the grocer’s secured bonds in pounds also surged.

Tesco said it had overstated its estimated profit by about 250 million pounds ($408 million) by booking some income before it was earned and recognizing some costs later than they were incurred. The retailer, which this month named Dave Lewis as chief executive, suspended Chris Bush, the head of its domestic business, according to a person familiar with the matter, who asked not to be identified.

“This is not a small matter,” said Luke Hickmore, the Edinburgh-based senior investment manager at Aberdeen Asset Management, which oversees about $530 billion. “In some ways though, having a new CEO coming in makes this a good time for this to happen, if there is ever a good time.”

Tesco’s dominant share of the British grocery market is being eroded as discounters cut into the market. That has already obliged the Chesunt, England-based company to reduce its profit outlook twice in about two months, making this the third reduction.

Yields on the grocer’s 493 million pounds of 5.41 percent bonds secured by some of its stores also jumped, climbing almost 10 basis points to 5.16 percent, the highest since July 7, Bloomberg data show.

Credit-default swaps insuring against losses on Tesco debt increased as much as 20 basis points to 111 basis points, the most since 2003, and were trading at a five-month high of 108 at 10:45 a.m. in London, according to data compiled by Bloomberg.

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