It seems silly to suggest thatTesco(LSE: TSCO) could be at risk of running out of cash, but some analysts are now speculating that this could be the case. Now, I should say that this is only speculation, although recent events have only increased the level of caution among analysts.
Fall from grace
Tescos fall from grace has been well documented. Multiple profit warnings, sliding market share and the recent over-statement of profits have all contributed to the supermarket giants downfall.
Unfortunately, it seems as if Tesco is rapidly losing the support of the City and its not just analysts turning against the company.
Indeed, it emerged at the end of last week that just before Tescos 250m profit overstatement was announced, the company pulled a3bn financing arrangement. The grocer had been in discussions to sign up 15 banks for a 3bn revolving credit facility, designed to give it financial flexibility.
While Tesco already has a sizeable financing facility in place, the companys inability to complete this new facility has worried credit rating agencies. In particular, some major ratings agencies have placed Tescos on review for a credit rating downgrade. A downgrade could hamper the companys ability to borrow and meet short-term obligations.
Dash for cash
Luckily, it has emerged today that Tesco has been able to play down cash-call fears by tapping banks for a 2.5bncredit facility. Tesco has, within the past few days, convincedsix banks to expand its existing credit facility in order to protect against potential ratings downgrades
However, these banks have forced Tesco to pay a higher fee for their services and toguarantee the facilitys flexibility.Its clear that the Tescos backers are cautious about lending to the retailer.
Will take time
For the time being then, it seems as if Tesco has enough cash to support itself. Nevertheless, with customers flocking to the discounters, it remains to be seen how much longer the retailer can support its huge network of stores and distribution centres without reporting a loss.
As Tesco owns the majority of its property, around 24bn worth in fact, the company will be able to sell off property to pay creditors if things get much worse.
But things already seem to be changing at the retailer, with new CEODave Lewis taking drastic action to turn things around. Some analysts hope that the companys recent mistakes will give Mr Lewis enough support from shareholders to completely overhaul the UKs largest retailer.
Things could get worse
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
