TOP NEWS: Moody's Upgrades Tesco Debt Rating Back To Investment Grade

(Alliance News) - Moody's Investors Service said Tuesday it has upgraded the credit rating for ...

Alliance News 25 June, 2019 | 2:44PM
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(Alliance News) - Moody's Investors Service said Tuesday it has upgraded the credit rating for Tesco PLC back to an investment grade Baa3 with a Stable outlook amid improving profit performance and debt reduction despite a "challenging" market.

The credit analyst upgraded the rating to Baa3 from a "junk" status Ba1 rating previously. Moody's also attached a Stable outlook, after having pushed the firm to a Positive outlook in June 2018.

"Today's upgrade reflects the improvement in Tesco's operating profit over the last few years and our expectations of continued profit growth, cash generation and debt reduction amidst a challenging competitive environment," Moody's Senior Credit Officer David Beadle said.

The credit analyst explained that Tesco had a "clear market leadership" in the UK as well as some international exposure. Despite "significant" competition hurting margins, the supermarket has "successfully enhanced price competitiveness, product availability and quality perception at the same time as making material cost savings to support margin recovery" in the last few years.

For the year ended February 23, Tesco's operating margins widened to 3.5% from 2.9% the year prior. Excluding the impact of its GBP3.7 billion takeover of wholesaler Booker Group PLC in 2017, financial 2019 margins were 3.3%.

Moody's forecasts Tesco will be able to achieve its margins target of between 3.5% and 4.0% in financial 2020, excluding the impact of Booker.

The credit analyst also emphasised that Tesco's operating profit had more than doubled to GBP2.2 billion in financial 2019 compared to its "low point" in financial 2015. The 2019 reported figure was also more than a third higher than the year prior.

Tesco has focused attention on reducing its debt load, Moody's noted. Adjusted debt fell to financial 2019 to GBP18.7 billion from GBP26.1 billion two years earlier.

Moody's also emphasised that Tesco had "strong" liquidity which "offers important financial flexibility to manage working capital". At the end of financial 2019, Tesco held GBP1.9 billion in cash and had a GBP3.0 billion undrawn bank facility. The firm also holds GBP14.6 billion in freehold property which "constitutes an additional source of financial flexibility".

Shares in Tesco were 0.7% lower at 229.80 pence in London on Tuesday.

By Ahren Lester; ahrenlester@alliancenews.com

Copyright 2019 Alliance News Limited. All Rights Reserved.

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Securities Mentioned in Article
Security Name Price Change (%) Morningstar Rating
Tesco PLC 238.90 GBX 0.17
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