Recent profit warning puts Tesco's credit metrics into 'junk' territory

30th Sep 2014 15:47

For analysts at Nomura the latest 'profit warning' from Tesco puts that company's credit metrics effectively into 'junk' territory, as per a research note issued on 29 September.As regards the company's fundamentals, if one takes the better part of the firm's £250m profit warning at face value then that means its operating margins in the UK, on an EBIT basis, would come in at 2.8%.The key metric is the company's gearing they point out and, in turn from the above, they estimate that the retailer's net debt to operating earnings (adjusted EBITDAR) comes in at 3.65, whereas the threshold for 'junk' in the sector comes in at 3.5.However, while they believe that a rights issue just got "a lot more likely" they still do not believe it should be the "base case" , nor do they believe it would be the right thing for the supermarket operator to do.Hence, they further point out that on the basis of the company's debt refinancing schedule, and of the current likely rates - using CDS on existing debt as a proxy for example - suggest the impact of becoming and remaining junk for several years in terms of interest cost would be negligible.Should the company attempt to recover a position in the middle of the pack in terms of the aforementioned debt multiple that would imply raising about £2bn, or issuing approximately another 15% of shares, "probably at a significant discount".The broker maintained its 'neutral' recommendation on the shares and 200p target.As of 15:40 shares of Tesco were down by 1.63% to 185.65p.