Tesco Moves Nearer Junk as S&P Places Grocer on CreditWatch

Tesco Plc, the U.K. grocer that’s grappling with fallout from overstated earnings estimates, moved closer to losing its investment-grade credit status as Standard & Poor’s placed it on negative CreditWatch.

The new outlook will remain in place while S&P considers “the effect of any management actions to improve the group’s financial risk profile,” according to a statement yesterday from the credit-ratings provider. S&P has a BBB- rating on Cheshunt, England-based Tesco, one level above junk.

“We anticipate that Tesco’s profitability will continue to weaken as market competition in the U.K. remains high, possibly even intensifying over the next 12 months, perpetuating the burden on the group’s business risk profile,” S&P said in the statement explaining its action.

Tesco has had one of the toughest years in its history, issuing three profit warnings since June as the loss of shoppers to discounters Aldi and Lidl has been compounded by the discovery of an accounting black hole. Chief Executive Officer Dave Lewis said Dec. 9 that annual earnings would be about half an August forecast, sending the shares down to the lowest level in almost 15 years.

In an effort to win back customers, Lewis is changing the way the grocer works with suppliers, adding staff and cutting prices. The CEO is reviewing all aspects of the business, with analysts speculating it may divest operations in countries such as Thailand or South Korea, or assets such as the Dunnhumby data-analytics business.

The cost of insuring Tesco’s debt from default rose 4.1 basis point this morning and 43.5 basis points since the beginning of the week to 178.7 basis points, the most since December 2008, according to data compiled by Bloomberg. The grocer’s 750 million-euro ($932 million) bonds due July 2024 dropped 0.3 cents early today and are down 3.1 cents since the beginning of the week to a record low of 93.9 cents on the euro.

The grocer’s declining earnings will “significantly weaken credit metrics,” S&P said. Tesco’s ratio of debt to earnings before interest, taxes, depreciation and amortization is seen moving toward five times, it said.

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