Tesco getting hammered after rating downgrades

October 26
7:15 AM 2014

Two credit rating agencies have reduced Tesco's rating to the cusp of investment grade after a horrible set of first half numbers on Thursday.

Late on Thursday, Fitch dropped Tesco a notch to BBB-, resolving a rating watch negative placement, but keeping a negative outlook.

Moody's added to the misery last night by cutting the company to Baa3 from Baa2.

Moody's, though, has kept its rating on review for downgrade. And that means the UK retailer is now teetering on the edge of junk status - a level which could trigger a wave of forced selling among holders of its £16bn senior unsecured debt.

While Thursday's results had a minimal effect on Tesco's debt - with five-year credit default swaps actually tighter on the day - the downgrades have caused something of a bloodbath on Friday morning.

Five-year CDS is a massive 34bp - some 25% - wider at 165bp, making it by far the worst performer on the Markit iTraxx Main index.

The company's sterling bond curve is also around 40bp wider versus swaps, matching the move wider on its euro issues.

Standard and Poor's downgraded Tesco to BBB in early August, and put the rating on credit watch negative late last month. 

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