Moody's downgrades Tesco debt to 'junk' status

With its debt downgraded to ''junk'' status Tesco, the UK's biggest retailer, could find its negotiating power cut on potential asset sales as the company embarked on a long-awaited recovery designed to reverse its sliding fortunes, Reuters reported.

On Thursday, Tesco's shares gained as much  as 15 per cent in their biggest one-day increase since 1988 after the grocer reported much better-than-feared Christmas trading and new boss Dave Lewis detailed plans to cut costs and sell assets to fund lower prices and recover lost market share.

However, that failed to cut ice with ratings agency Moody's, which downgraded the company's debt to non-investment grade, or 'junk', on expectations that profits would continue to be under pressure due to changes in the British grocery market.

The move marked another reverse for the UK's  biggest private employer, a staple of British pension funds that was rated A1 by Moody's in 2008. Tesco continued to reel from an accounting scandal and issued four profit warnings last year.

''It's not particularly helpful for Moody's to downgrade them to junk on the day it looks like they are starting to recover,'' said Richard Dunbar, investment director at Aberdeen Asset Management on BBC radio.

Meanwhile Tesco's Irish arm was talking with staff and unions about "future-proofing" a defined benefit pension scheme that served 3,000 existing and 1,300 former staff as the stricken retailer dropped a similar scheme in the UK , the online edition of the Irish Independent reported.

The talks come with the retailer cutting its cost base across the group as it tried to regain market share, investor confidence and financial momentum following a disastrous 2014.

According to a spokesperson, it was too early to predict the outcome of the pension talks in Ireland.

In an update to investors yesterday, the top management of the company refused to be drawn on their plans for Ireland as the company's operations in the country came in as the worst-performing for the chain in Europe outside the UK.

Tesco's like-for-like sales, excluding VAT and fuel, declined 5.5 per cent in Ireland in the crunch Christmas trading period, which ran for six weeks to 3 January.

In the 19 weeks to 3 January like-for-like sales in Ireland declined 6 per cent with the performance in Ireland holding back a wider recovery in Tesco's European business.

Tesco chief executive Dave Lewis, a former Unilever executive, plans to close the retailer's UK headquarters and loss-making UK stores, as part of a £250-million cost cutting plan in a drive to boost the flagging chain's fortunes.