Tesco's credit rating – what it means for you?

Yesterday’s warning by Standard & Poor that ongoing pressure from intensifying competition, weak consumer spending and lower profits could trigger a downgrade to its risk profile and credit rating should not be seen as another nail in the Tesco coffin.

Tesco's previous ratings
In fact, regular readers will know that Tesco have been here before (Moody’s in April 2012, and May 2009). It also helps to bear in mind that the credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Yesterday’s announcement referred to a long term (i.e. after a year) rating, making it more expensive to borrow, but no issues in the short term.

Why the rating matters to you
However, the mention of  ‘lower profits’ as a cause, means that Tesco is effectively prevented from drawing heavily on current profitability to fund its £1bn revitalising initiative, or indeed any ‘nuclear pricing’ options (see KamBlog).

What Tesco needs to do
Apart from a need to make "targeted" disposals, cutting back capital expenditure and/or shareholder pay-outs as possible options, the ratings threat means that Tesco will be forced to place more emphasis on internal savings….
As you know, for a retailer these can include a combination of cost-price reductions, optimising of credit terms/settlement discount trade-offs, increased trade funding, strict application of deductions and improved service levels…

This means it is perhaps time to re-evaluate your position on each of these elements of your Tesco trading relationship, as a basis for determining your fair share of any help Tesco may require in funding its strategy.

Deriving your bespoke rating of the customer:
Finally, a ratings agency score can be a fairly blunt instrument from a NAM’s point of view. Better for you to derive a bespoke rating via a combination of analysis of the customer’s ROCE, Net Margin, Stockturn and Gearing, overlaid against your terms, trade-funding and service level, in order to establish and demonstrate your fair share of any remedial action…

Not doing so can represent more risk than you need, in the current climate.

A euro parable: the couple with a joint account

Increasing the bank-leverage of a pre-nuptial joint account by adding extra family members and strict rules of compliance can benefit all, at first…... Adding a joint credit-card guaranteed by richer family members can appear to provide a short term solution to personal financial ‘mis-behaviour’ of those family members who in return promise to mend their ways via unsustainable cut-backs…
Attempts to eject problem members can cause the bank to threaten closure of the entire joint-account, resulting in core-members having to re-mortgage to prevent collapse… If you really want to understand how close the euro is to collapse, read this fascinating parable on the FT site. 
In other words, whether you are buying or selling, you owe yourself a couple of ‘what-ifs’ on the unmentionable, while others hope something will turn up, whilst awaiting an announcement from Brussels…
Meanwhile, have a real-world weekend, from the NamNews Team!

Tesco beats most European sovereign states!

Tesco has raised $1bn (£640m) of debt at interest rates cheaper than most European sovereign states.

According to the Telegraph, Britain's biggest retailer offered investors interest of 2pc and 2.7pc on three–year and five–year debt respectively. That compared to Italy, which sold three–year government bonds with a yield of 7.89pc............... Money-machines that happen to sell groceries?

Apart from savvy consumers being willing to trust Tesco more than banks with their money, the market is now showing that shoppers feel the same way about Tesco and politicians….

In other words, instead of politicians running the country like a shop, perhaps it is time to hand the job over to professional shopkeepers?

Seriously, does anyone still believe that finance-based negotiation is a discretionary skill-set in optimising supplier-retailer relationships?