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Tesco debt and credit ratings in question following accounting crisis

Published:  30 September, 2014

Tesco's senior unsecured long-term debt rating and its short-term credit rating was placed "on review for a downgrade" by credit rating agency Moody's Investor Service following the announcement that it had overstated its profits for the first six months by an estimated £250 million.

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Tesco's senior unsecured long-term debt rating and its short-term credit rating was placed "on review for a downgrade" by credit rating agency Moody's Investor Service following the announcement that it had overstated its profits for the first six months of fiscal year 2015 by an estimated £250 million.

Sven Reinke, a vice president and senior analyst and lead for Tesco at Moody's, said: "We are reviewing Tesco's ratings for downgrade following that it had overstated its profits for the first six months of fiscal year 2015 by an estimated £250 million. The review will primarily focus on the results of a review into the group's accelerated recognition of commercial income and delayed accrual of costs, and the resulting implications for the company's financial performance."

According to the Moody's statement the review was a direct result of the misreported financials of the company. The "rating review was triggered by Tesco's trading update announcement of September 22 2014," the statement said.

The  review will "focus mainly on the result of the review undertaken as well on Tesco's measures to preserve its cash flow generation and stabilize its operating performance in the UK," said the report.

Moody's currently rates Tesco's long-term debt credit rating is Baa2 and its short-term credit rating is Prime-2.  Moody's rates the long-term debt and short-term debt and a company's ability to pay it back simultaneously. The Baa credit rating is defined as: "Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics," according to Moody's symbols and definitions guide.  

The additional number added, like the Baa2, is added to each generic rating classification. According to Moody: "Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category."

Tesco credit rating was downgraded in June to the Baa2 rating.  According to the statement released in June the credit downgrade "rating action was driven by the decline in Tesco's group trading profit for fiscal year 2013-14, an increase in its IAS 19 pension deficit, and weak sales performance in the first quarter of fiscal 2014-15 with a group-wide 3.2% like-for-like sales decline (excluding petrol). As a result, Moody's revised its expectations for Tesco over the next 12-18 months downwards."

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