MARC has reaffirmed the rating of Tesco Stores (Malaysia) Sdn Bhd’s (“TSM”) RM750 million guaranteed commercial paper programme at MARC-1 (cg). The short term corporate debt rating of TSM reflects the credit strength of its ultimate holding company, Tesco PLC (“Tesco”), which guarantees the commercial paper programme.

TSM was incorporated on 24 July 2000 to operate hypermarkets in Malaysia. Currently, TSM operates 14 stores. Most of the outlets are situated in Klang Valley and the rest are located in Melaka, Pahang, Perak, Kedah and Penang. TSM intends to position itself as an all-inclusive hypermarket and superstore appealing to the mass market by offering a variety of goods and services of good quality at affordable pricing.

Tesco has provided an irrevocable guarantee to Mayban Trustees in respect of all sums owing by TSM under the Trust Deed for the payment of the guaranteed liability of up to RM750 million. Under the Guarantee Agreement, Tesco undertakes that whenever TSM fails to pay any amount of the guaranteed liability due, it shall, within five business days of receiving any demand from Mayban Trustees, pay the stipulated amount.

Under the Guarantee Agreement, Tesco will continue to guarantee TSM’s liability due under the commercial paper programme for as long as Tesco or any of their subsidiaries is still the majority or controlling shareholder of TSM. However, Tesco will not be liable to pay for any amount pursuant to the Guarantee Agreement if TSM’s failure to pay the guaranteed amount is due to intervention or nationalization by the Malaysian government.

TSM’s financial performance remains in the red for the latest financial year due its ongoing expansion plan. For FY2006 which incorporated 14 months results, the company opened 7 new outlets across the country. As a result, the company posted a revenue of RM1.3 billion against RM576 million in the previous year, a significant increase of 122%. Despite the expansion, the company’s gross margin remains consistent for the last 2 years with a margin of 13% posted. Although the company’s financial profile is weak, TSM is backed by its strong financial flexibility, attributed to the strength of its shareholders Tesco Holdings BV and SD Holdings Berhad, which are wholly-owned subsidiaries of Tesco and Sime Darby Berhad (“SDB”) respectively.

TSM has recently announced that the company has acquired eight outlets of Makro Cash & Carry Distribution (M) Sdn Bhd for an undisclosed amount. The acquisition would be financed by an inter-company loan from its parent company, Tesco PLC. Since the rating of the CP programme is predicated on the corporate guarantee of the parent company, the above mentioned proposed loan and acquisition will not have any material impact on the rating.