Court Ruling Makes Rating Difficult to Assess

Tesco and other UK grocers are affected.

On June 3, 2021, the Court of Justice of the European Union (ECJ) ruled that the provisions in EU law relating to comparability between two different roles based in different establishments, but within one organisation, do apply directly to private businesses in the UK and can be advanced under European and UK law. Moody’s comments on a decision which was prompted by the “equal pay” claims of around 6,000 former and current Tesco Plc employees and allows claimants to compare the value of their work to that of their colleagues in Tesco’s distribution centres.

“Assuming that Tesco could be forced to pay compensation and increase the pay of each of its 250,000 store workers by £10,000-£20,000 a year,” says Moody’s, “the implied increase in annual wages could be £2.5-£5.0 billion.” Such an amount could more than halve or even exceed Moody’s forecast of Tesco’s £4.2 billion Moody’s-adjusted EBITDA over the next 12-18 months.

“The company’s Baa3 rating and the stable outlook do not factor in any significant cash outflow related to the equal pay claims”, warns Moody’s. “Tesco has made no provision in its accounts on the basis that any potential liability is not considered probable by the company’s directors. Tesco’s leverage, measured in terms of Moody’s-adjusted gross debt to EBITDA, was around 4.4x in fiscal 2021 (ended 27 February) and we expect it will improve to around 3.8x within the next 12-18 months, compared to leverage guidance of 3.75x-4.5x for the Baa3 rating.”

Tesco’s rating is also by the other leading agencies, S&P’s and Fitch Ratings, just a notch above the speculative grades. Whether the company’s liabilities slide into the speculative realm depends on the behavior of the courts. The observation of the rating must therefore start here: