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Another rating agency downgrades Tesco to Junk

| International retailers

Standard & Poor's (S&P) has become the second rating agency in a week to downgrade Tesco to junk status, suggesting that it is unconvinced by Chief Executive Dave Lewis’ turnaround strategy unveiled last week.

 

After a similar downgrade by Moody’s last week, S&P lowered the senior long-term credit rating for the grocer to BB+ from BBB.  Whilst praising Tesco’s efforts to improve its cash position through cost-cutting and the sale of some assets, S&P warned of tough times ahead for the retailer amid an intensifying price war in the sector.

The agency said: "In our view, the dividend cancellation, cuts to future capital expenditure, and potential disposal of the dunnhumby business, if achieved, should enable Tesco to improve its cash position by more than £3bn over the next financial year ending 2016. At the same time, however, we expect market conditions to remain highly competitive for retailers, particularly in the UK, which accounts for about two thirds of Tesco's retail sales and profits. We anticipate that increased competitive and price pressures in the UK from both traditional and discount retailers could suppress any benefits from various management strategies oriented toward improving trading performance.”

Despite the downbeat assessment of Tesco’s immediate future by the rating agencies, investors have responded more positively to its turnaround plan with its share price up by nearly 20% since it announced the moves last week.

 

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