Ocado has had its debt ratings downgraded by ratings agency Moody’s on lower-than-expected profitability and pressures in its retail business.

Moody’s cut Ocado’s corporate debt rating to B3 from B2 – now six notches below investment grade and viewed as “highly speculative”.

The downgrade reflects the “prolonged operating underperformance” and expectations of lower EBITDA generation over the next 12 to 18 months, driven by increasing competitive pressures in the retail business and a slower ramp-up of its International Solutions business than expected.

Moody’s noted its international business would remain lossmaking until fiscal year 2024, while the client base of Ocado’s technology business was “currently limited”, with Ocado Retail (eight CFCs) and Kroger (20 CFCs) accounting for the majority of committed modules and expected future fee revenue.

Ocado’s capital spending plans have increased significantly since 2020 after the company agreed to sell a 50% stake in Ocado Retail to M&S.

Ocado’s other international partners include Sobeys, ICA, Casino, Alcampo, Coles and Auchan Poland. The build-out of CFCs would require “major investments”, Moody’s said, with total capital expenditure likely to rise to £800m per year over the next six years.

However, Moody’s did give the ratings a stable outlook in recognition of its “adequate liquidity profile”, having been strengthened by a £575m rights issue in June and the agreement of a £300m credit facility with banks.

“Ocado currently has sufficient liquidity to fund its planned capital expenditures through fiscal 2025 based on Moody’s base case,” Moody’s stated.

Moody’s said a ratings upgrade was unlikely for the next two years. It would need to see strong profit growth, sustained positive free cash flow and a material deleveraging, it added.

An upgrade would also require a significantly broader customer base for the International Solutions and UK Solutions & Logistics segments, and absence of material ongoing litigation risks.

Last week Ocado announced a £211m first-half loss as a whopping £157.3m impairment charge, including £76.6m on its property and equipment, hit its reported profit figures.

Revenues in the international solutions segment more than doubled to £59m, while UK solutions revenues were up 10.7% to £395.6m.

But the drop in retail contribution saw group EBITDA swing to a loss of £14m from a profit of £61m in the first half last year.

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