S&P downgrades Tesco by a notch
Tesco's credit rating suffered the third downgrade in twenty-four hours after Standard & Poor's (S&P) lowered its rating on the retailer giant to 'BBB-' from 'BBB'.
S&P cited lower profitability and negative expectations for like-for-like sales growth in the UK for the financial years 2015
and 2016 as the main factors behind the decision.
The decision comes only a day after Fitch Ratings and Moody's both downgraded Tesco by a notch.
On Thursday, the stricken retailer admitted overstating its profit expectations by £263m, a mistake which affected the group's
trading profit by £118m in the first six months of 2014.
"The downgrade reflects our view that Tesco's credit metrics will weaken due to lower profitability. We have revised downward our forecasts following confirmation by an independent investigation that Tesco overstated its profit
expectations by £263m," S&P said in a note.
The rating agency added that, although it had identified significant management and governance deficiencies at Tesco, it maintained its overall 'fair' assessment, taking into account the substantial changes that have already occurred and are planned for the supermarket chain.
"We continue to assess Tesco's business risk profile as 'strong' under our criteria, because although the group's share of the U.K. market has declined, it is far larger, at more than 28%, than the market shares of its nearest competitors," S&P said.
"Tesco's 'strong' business risk profile also somewhat reflects the benefits from its geographic diversification, in particular its presence in Southeast Asia and Europe."
S&P added that increased competitive and price pressures in the UK from both traditional and discount retailers could suppress any benefits from various management initiatives aimed at improving trading performance.
"We anticipate that Tesco's profitability will continue to weaken as market competition in the U.K. remains high, and may even intensify, over the next 12 months, perpetuating the downward pressure on the company's business risk profile," S&P said.
Tesco shares were down 1.58% to 168.29p at 16:06 on Friday.