Investors have somewhat fallen out of love with Tesco shares, as we discussed at length last week (see Trouble at Tesco). But what about the bonds? After all, the retail giant's trading difficulties are a long way from affecting its ability to pay its creditors.
Or are they? Credit rating agency Moody's has also lowered its opinion of the company, downgrading Tesco's credit rating from A3 to Baa1, citing increased competition and potentially lower margins. Should bond investors be concerned?
I would say probably not. It may well be true that the company's growth prospects have cooled, but we should view this in context. Tesco remains a large and highly profitable organisation (£3.8 billion for 2011) with relatively low levels of indebtedness (see last reports and accounts).
And while its core UK operation may be in need of some tender loving care, it is expanding in other areas - one of which is personal finance. Tesco Personal Finance issued bonds onto the London Stock Exchange's order book for retail bonds last year. Although Tesco's bank does not share the parent company's rating, the Tesco Personal Finance 5.2% Aug 2018 bond has traded lower over the last month (see blue line on chart). This perhaps echoes the negative sentiment seen in the equity and is a noticeable divergence from the range-trading behaviour of gilts.
It is also worth bearing in mind that the bank subsidiary has also released its own results (see link here). Profits are up 28.3 per cent and impairment levels are down. This suggests a good outlook for Tesco's bank, which is in the fortunate situation of being relatively new, and thus unencumbered with the type of balance-sheet horrors faced by its more established competition.
See our new-look corporate bond, gilt, and Pibs data tables here...
