Morrisons’ credit rating has been downgraded after the supermarket reported poor sales and profits in the latest blow for the UK’s fifth-largest supermarket.
Moody’s, the credit rating agency, said the outlook for Morrisons’ ability to repay its £7.5bn of debts had shifted to negative from stable and its existing junk rating knocked down one notch, from B1 to B2, indicating higher risk.
Citing an “aggressive financial strategy, high leverage” and private equity ownership as factors in the downgrade, analysts flagged concerns about “operating underperformance”, saying Morrisons was suffering from lower sales combined with higher costs for energy, wages and transport.
The downgrade was triggered by lower than expected profits for 2022, as revealed in figures published by Morrisons last month, which meant the retailer’s debts now stand at 9.1 times underlying profits against the credit rating agency’s expectation of 6.5 times.
Moody’s said the outlook was negative as Morrisons’ debt to profits ratio put it close to a further downgrade. However, the report added that the supermarket’s sales had risen ahead of Christmas and its market share had stabilised, according to data from the market research firm Kantar, suggesting profits could improve in 2023.
The supermarket chain was taken private in 2021 in a £7bn debt-fuelled takeover by the US private equity firm Clayton Dubilier & Rice, and the rising cost of living, supply chain logjams and political uncertainty have put the business under strain.
The retailer, which lost its spot as the UK’s fourth-largest supermarket to Aldi last year, said underlying profits fell 15% to £828m in the year ending 30 October, as revenues at established stores decreased by 4.2%.
Revenues were down despite a rise in prices, with inflation meaning consumers are paying more on average for each item. Annual food inflation hit 13.3% in December, according to the British Retail Consortium.
David Potts, the chief executive of Morrisons, last month defended the decision to exit the stock market, saying private equity ownership had not been a hindrance. He described last year as “one of transition”, adding: “We are combining well with CD&R to be more effective.”
The credit rating shift move could make it harder for Morrisons to borrow money and mean that suppliers demand payment upfront, putting increased strain on a retailer’s finances.
In a report published on Tuesday, Moody’s said Morrisons’ rating took into account the retailer’s “relatively smaller scale and greater loss of market share to the discounters during the first half of fiscal 2022 compared to the other three ‘big four’ UK grocers.”
The company’s overall rating was also affected by “high governance risk exposures including an aggressive financial strategy, high leverage, and its majority private equity ownership”.
Morrisons declined to comment on the credit rating downgrade.
