Moody's may cut Tesco

Moody's Investors Service said it placed Tesco's A1 long-term senior unsecured rating and prime-1 short term rating under review for possible downgrade.

The review was prompted by weaker-than-expected credit metrics, mainly driven by an increase in lease-adjusted debt and news that the company plans to acquire 36 Homever stores in South Korea from the E-Land Group for about £958 million, including existing debt. The deal is subject to approvals.

Moody's said the deal fits well into Tesco's strategy to expand internationally, in particular in South Korea, where the company will reinforce its existing market position with the additional retail space.

But, the agency said it considers the proposed transaction will further weigh on Tesco's credit metrics, which no longer appear as commensurate with an A1 rating category, as evidenced by a debt-to-EBITDA ratio above 3.5x in February 2008.

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