Financial Assessment of Tesco Plc

 

Introduction

Tesco Plc is a retail company headquartered in London in the United Kingdom. The company operates in the retail segments and companies with companies such as Morrisons, George Asda Walmart and Lidl (Deloitte, 2020).  The following is a brief analysis of the company’s financial health in terms of the suitability of its bonds based on its bond ratings.  This report assesses the bond ratings of Tesco Plc based on the different credit rating agencies and what it means for the company in terms of debt ratio and attractiveness of the company to the creditors.

Tesco bonds

In the case of Tesco Place the company has several bond notes, the company issued bond note in 1999 for thirty years which will mature in 2029. The bond was offered at an interest rate of 2%. The coupon payments were to be paid annually until the bond matured in 2029. The company also took another bond note in 2010 which was to mature in 2025 (Tesco Plc, 2020). The company was to pay the bond interest at a rate of 5% annually where the interest was to be paid annually while the principal was to be paid in tranches. The total liabilities of the company as it 2020 was in excess of 76.58% which was a high percentage. Due to the heavy debts that the company had in 2015 its bond rating was downgraded to junk status which meant that the bond investors were at a risk of losing their funds (Tesco Plc, 2021). It also implied that the shareholders’ capital was at risk as the company was in default hence the company’s assets could be attached for debt recovery. This consequently affected shareholders’ sentiments in a negative way and led to lower stock price and lower market capitalization of the company in the stock market.

However, in the case of Tesco Plc the company managed to overcome the headwinds in its economic environment in 2018 when the company’s debt was paid off. As of 2019 the company had debts worth £6 billionas indicated in the company’s financial statements. These were long term debts that were due in over one-year duration (Delagdug, 2019). Apart from the bonds the company had other form of debt which impacted its credit ratings. The company had debts in form of tax obligation that it was expected to pay over the long term. Others were pension obligations that were also due in the long term.

 

Analysis of the Tesco bonds and credit rating

In order to effectively assesse the creditworthiness of a company one has to use the credit evaluation tools that are provided by various agencies the most common being the Moody’s Finch and S&P credit ratings. These credit ratings serve to inform the investors, banks and other agencies about the financial health of the company especially in its ability to pay the debts that are due (White, 2010).

The Moody’s is credit rating system by Moody’s company evaluates the creditworthiness of companies. It is very useful especially for companies issuing out bonds or company’s requesting loans from banks. Moody’s credit rating tools is of much help to investors as it informs them of their likelihood to lose their initial investment on the company bonds based on the bond rating by the Moody’s (Moody’s Investor Service, 2019). Moody’s tool assess the investors losses in the case of default on the bonds. The Moody’s rating ranged from Aaa to C where Aaa was the least risky and high quality companies that were less likely to default while the C was the low quality companies that were highly risky and likely to default on the debt. Based on the Moody’s credit rating, Tesco Plc was upgraded to Baa3 in the year 2019. This meant that the outlook for the company was stable. It implied that the company was less risky for its investors. It further implied that the Tesco’s operations were profitable and that the busies could pay its long terms debts. Moody’s also examined the short term debts and provided an assessment on whether the company was risky or not. In case of Tesco, the company was provided with a P-3 rating which was indicated that the company was stable in the short term and that it was in a position to pay its short term debts (Becker and Milbourn, 2011).

The other key tool that is used to assess the credit and bonds issued out by Tesco is that of Finch. Finch company rates the company as either investment grade companies (AAA), non-investment grade companies (BB) and Non rated companies.  For short term loans and debt obligations which are due within a duration of one year. Finch provided a rating of F1- D rating where F1 was the best rating while D was the lowest rating that indicated the highest possibility of default (Fitch Ratings, 2020). For the long term bonds, Tesco had a rating of BBB, the lowest grade for investment grade companies which indicated that the company was relatively stable but very likely to slip into non-investment category as it can be impacted by market forces negatively. For the short term loan, the company had a rating of F3 (Tesco Plc., 2020).  This means that Tesco has the capacity to meet its debt obligation within the short term. However, unforeseen market forces or circumstances could make the company to default on its short term obligation which made the company a bit risky in case external factors have much influence on the company.

The other tool that was used to assess the sustainability of the company when it comes to bonds and debts is the Standard and Poor credit rating tool.  The S&P tool assessed the company’s creditworthiness using various rating criterion. For the long term debt, there were two categories which are for the investment worth companies and non-investment grade companies. investment grade mostly ranges from AA-BBB where AA is the highest category while BBB was the lowest category (Delagdug, 2019). The best rating is the AAA which indicates that the investment grade of the company is doing well while the BBB indicates that the company can meet its obligations but it can fail to do so in case of adverse changes in the market environment is in the external environment in which the company operates.  In the case of Tesco, the company has a BBB rating indicating that the company’s performance is table and that it can been its debts obligations but it can fail in the event that there are adverse circumstances affecting the company operations.  The implies that the company is highly leveraged hence small issues in the external environment can impact it negatively (Delagdug, 2019).  On the short term debts, S&P rating commences from A-1 to D where A-1 is for companies with huge capacity to meet short term obligations while the company has the capability to meet all its long term debt obligations even in different economic environment and circumstances. Tesco has the -3 rating which implies that it has the capability to pay the short term obligations but these capabilities can cease in case the company meets challenges (Tesco Plc, 2020). Based on this tools it was clear that Tesco had a stable outlook and was capable of repaying its bonds ad debt obligations unless there were adverse events in the market.

 

References

Becker, B. and Milbourn, T. (2011) ‘How did increased competition affect credit ratings?’, Journal of Financial Economics, 101(3), pp. 493–514.

Delagdug. (2019) S&P upgrades Tesco on strong earnings, deleveraging. Available at: https://www.spglobal.com/marketintelligence/en/news-insights/trending/xddio0tnsqmtnrpz0pyrww2 (Accessed 2 January 2021).

Deloitte. (2020) Retail Trends 2020: Finding purpose through challenge. Available at: https://www2.deloitte.com/uk/en/pages/consumer-business/articles/retail-trends.html (Accessed 2 January 2021).

Fitch Ratings. (2020) Fitch Affirms Tesco Credit-Linked CMBS Transactions; Outlook Stable. Available at: https://www.fitchratings.com/research/structured-finance/fitch-affirms-tesco-credit-linked-cmbs-transactions-outlook-stable-30-07-2020 (Accessed 2 January 2021).

Moody’s Investor Service. (2019) Moody’s upgrades Tesco to Baa3; stable outlook. Available at: https://www.moodys.com/research/Moodys-upgrades-Tesco-to-Baa3-stable-outlook–PR_403613#:~:text=London%2C%2025%20June%202019%20%2D%2D,)%2C%20the%20UK’s%20largest%20grocer (Accessed 2 January 2021).

Tesco Plc. (2020) Debt investors. Available at: https://www.tescoplc.com/investors/debt-investors/ (Accessed 2 January 2021).

Tesco Plc. (2021) Tesco Plc Annual report. Available at: https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf (Accessed 2 January 2021).

White, J. (2010) ‘The Credit Rating Agencies’, Journal of Economic Perspectives, 24(2), pp. 211–226.

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