05 October 2017 by lberuti
TSCOLN ( Tesco Plc ) posted yesterday pretty strong first half results. The company continues to implement its current strategy in the UK and its margins are benefitting from it in a tough environment. Cash flow generation has been solid, boosted by minimum capex, working capital improvements and some marginal disposal proceeds. All in all, the balance sheet is gaining strength, which vindicates the management’s objective to return TSCOLN to an investment grade rating. Credit metrics were also helped by a dramatic reduction in the company’s pension deficit. It has gone down £3Bln to £2.4Bln. This whopping fall comes from a change in the discount rate used to compute the present value of future pension payments - TSCOLN no longer uses yields of gilt and uses instead the yields of investment grade bonds which are higher – and from findings by the Continuous Mortality Investigation Ltd, which produces the longevity forecasts used by corporate pension schemes and insurers, which show that the average life expectancy of men and women aged 65 declined in the past couple of years. As one commentator put it, “Tesco Plc's investors had plenty to smile about on Wednesday, even if one reason to celebrate was the prospect of an earlier death”. After a 15bps drop since the beginning of the week, at 130bps, TSCOLN’s 5-year risk premium is back to its tightest level of the last 3 years.