News that Standard and Poors (the well know credit ratings agency) has lowered the long term and short term credit rating for Tesco from ‘A-‘ to ‘A’ and ‘A-2’ to ‘A-1’ respectively has surprised some in the market. The move comes after, and because of, the move to acquire the outstanding 50% stake in the Royal Bank of Scotland joint venture.

Tesco will need to increase debts to operate the financial division and this, together with an apparent insatiable appetite for growth, has seen the company’s credit rating downgraded. While the move may not look much on paper it will result in higher financing costs for the group and put a little more pressure on the balance sheet. The idea of expanding when values are low is a sound one but the only problem is the need to increase the debt level.

While Standard and Poors has reduced the credit rating for Tesco it sees no major issues with the underlying business and the prospects for the future. Cash flow is excellent, profits are holding up well in troubled times and the group is well placed to leave the economic slowdown much stronger than many. However, taking total control of the financial operation will be an interesting chapter in the future of the group.

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