Tesco Says Moody's Outlook Cut Won't Hurt Financing
LONDON (Dow Jones)--U.K. retail giant Tesco PLC (TSCO.LN) said Thursday that Moody's credit outlook downgrade won't hurt its ability to either finance its extensive operations or financing costs.
The credit rating agency's move late Wednesday to downgrade Tesco's outlook follows the group's investment in retail property, a Tesco spokesman told Dow Jones Newswires.
"It mainly centers around the increase in our operating lease commitments and that's come about...firstly through the sale and lease back deals we've done, where we have sold off some property over the last couple of years.
"But also our investment in China and in the U.S. where the properties are primarily in leasehold development, and also the Homever stores that we acquired in South Korea, where 15 of those, which is almost half, were leasehold."
Tesco - the world's third-biggest retailer by sales - still owns around 80% of its property. "We're still predominately property owners, rather than leaseholders," the spokesman said.
"We continue to reiterate that we've got a strong balance sheet," he said.
He also reiterated Tesco's recent comments at its full-year results presentation, saying that it is "focused on managing cash and reducing our debt this year." Tesco's net debt totaled GBP9.6 billion as of Feb. 28.
Standard & Poor's and Fitch Ratings have told Tesco that their A- ratings won't be changing following Moody's move, he added.
Sanford C. Bernstein's Christopher Hogbin says it's not an issue for Tesco, noting at A3, it is still rated 3-notches above sub-investment grade (junk) territory.
Tesco remains Bernstein's top pick in the U.K. grocery sector as modest 11 times 2010 earnings multiple "does not fairly reflect robust outlook for its UK business or the growth potential of its international and retailing services operations following TNS data yesterday." Hogbin has an outperform rating on Tesco and 450 pence price target.
At 0830 GMT, Tesco shares were down 7 pence, or 2%, at 366 pence in a lower FTSE 100 index. Its shares are up 1.8% since January.
Credit traders said the outlook change had made little impact on the cost of insuring debt issued by Tesco, which was quoted at 95/105 basis points, a touch wider in line with the weaker market.
One credit analyst said that while a ratings downgrade is far from a done deal, debt markets are already pricing in this type of action. For example, Tesco trades at a considerable premium to French retailer Carrefour SA (CA.FR), which is also rated A3, but Carrefour's credit default swaps are quoted considerably tighter, at around 60 basis points.
Credit default swaps are tradable, over-the-counter derivatives that function like a default insurance contract for corporate debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.
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