Tesco’s debt downgraded to ‘junk’ status by Moody’s

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 a long-awaited recovery plan designed to reverse its sliding fortunes.

On Thursday, Tesco’s shares had risen as much as 15% in their biggest one-day gain since 1988 after the grocer reported much better-than-feared Christmas trading and new boss Dave Lewis 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.

“It’s not particularly helpful for Moody’s to downgrade them to junk on the day it looks like they are starting to recover,” said Richard Dunbar, investment director at Aberdeen Asset Management on BBC radio.

* Reuters