S&P may downgrade Tesco to junk

[LONDON] Ratings agency Standard & Poor's said it may downgrade Tesco's credit rating after its latest profit warning, moving the British grocer closer to losing its investment grade status.

S&P said it believed Tesco's profitability would continue to weaken as competition within the British retail sector remained intense. Any positive changes introduced by the new management could be wiped out by the highly competitive environment.

Tesco cut its profit forecast for the fourth time in five months on Tuesday after failing to adapt to changes in the market, such as the increased popularity of discount stores Aldi and Lidl and a boom in convenience stores and online shopping that has hit Tesco's huge out-of-town sites.

It has also admitted overstating profits by 263 million pounds (US$413 million).

"We anticipate that Tesco's profitability will continue to weaken as market competition in the UK remains high, possibly even intensifying over the next 12 months, perpetuating the burden on the group's business risk profile," S&P said.

As a result, the ratings agency has put Tesco's BBB- long-term corporate credit rating, which is one notch above junk status, on creditwatch with negative implications.

Ratings agency Moody's has also moved Tesco to one notch above junk and put it on review for a further downgrade after recent results showed its pension deficit and net debt growing while trading profits slumped.

Fitch also has Tesco on a negative outlook.

REUTERS