S&P may downgrade Tesco's credit rating to junk

Standard & Poor's may downgrade its credit ratings of seven U.K. CMBS transactions with exposure to Tesco if the supermarket operator's long- and short-term corporate credit ratings fall below investment grade. 

All seven CMBS transactions are currently rated 'BBB-‘, on the brink of junk status, as is Tesco itself. S&P placed Tesco and the related CMBS transactions under review for possible downgrades on Friday.

Tesco, as tenant and financial guarantor, is the primary source of funds for repayment of the notes in the seven CMBS transactions — including Delamare Finance and Tesco Property Finance 1 through Tesco Property Finance 6— that closed between April 2004 and February 2013. “Our ratings on these notes are currently credit-linked to our long-term 'BBB-' corporate credit rating on Tesco,” S&P stated in its report. 

The review comes after the U.K. supermarket retailer announced that its full-year trading profit would not exceed £1.4 billion ($2.19 billion); previously, it had estimated that it would report earnings of £2.5 billion for the year.

In a November report, Barclays analysts said that operating performance for Tesco and other U.K. large supermarket have weakened as a result of the greater competition from hard discount supermarkets such as Aldi and Lidl, and online competition for non- food items from the likes of Amazon. “These trends look set to continue, with Aldi/Lidl expected to double their space over the next five years and online competition likely to increase,” the report states. “As a result, pricing power of the incumbent supermarket players remains under pressure.”

If Tesco’s corporate rating falls below investment grade, it is likely the supermarket will move to de-link the securitizations from its credit rating as a defensive move against further downgrades, according to Barclays.

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