What happened?
Tesco (LSE:TSCO) absolutely stormed the market yesterday.
Following the announcement of brutal cuts, shares closed at 209.25 yesterday, up 15%, the largest single-day rise in 27 years. Tesco’s surge dragged the FTSE 100 up 2.34%, adding £3bn of value to the index by the day’s close.
So what’s the problem?
Credit rating agency Moody’s relegated Tesco to ‘junk’ status today, despite the company’s commitment to more efficient operations. Sven Reinke, Moody’s vice-president and senior analyst, said Tesco still faced significant challenges from discount retailers.
“We have downgraded Tesco’s ratings because structural changes in the UK grocery retail market will continue to challenge the company’s operating performance even with the benefits of the significant restructuring actions.”
“Moreover, we think that the company’s efforts to stabilise the UK operations and to protect the balance sheet, while helpful, will take time to implement.”
What did the commentators say?
Tesco representatives had met with the three main credit rating agencies on Wednesday in an unsuccessful attempt to avoid a downgrade, said the Telegraph. Moody’s decision to downgrade Tesco’s credit rating is a blow to the group, which might face higher interest on debt in the near future.
Tesco also came under fire from Pat McFadden, MP for the deprived Wolverhampton South East constituency. The area is one of 49 in which Tesco have abandoned plans to build new outlets.
“This decision is a betrayal of the people of Wolverhampton and a clear breach of the promise made to the people of the city.” said McFadden. “Less than a year ago, the UK managing director of Tesco gave a pledge on behalf of the company that this investment would go ahead in the coming financial year.
What next?
Tesco will have to rebuild trust both with investors and within local communities. “The proof of their future action can only be in what they do rather than what they say. After today, why would anyone believe what they promise about the future?” said McFadden.