S&P report revisits no-deal risks in the countdown to Brexit
The UK reaching a compromise with the EU over Brexit remains a daunting challenge given the number of stakeholders, the complexity involved, and the tight timetable. A failure to reach an agreement in the coming weeks means that the likelihood of a no-deal Brexit remains meaningful and not to be discounted.
A no-deal Brexit from the EU could lead to a few rating downgrades, negative outlooks, or CreditWatch actions on issuers with insufficient rating headroom to weather the related economic slowdown or disruption, says S&P Global Ratings in a report.
“These actions will vary depending on how exposed an issuer’s industry is to a no-deal and the strengths and weaknesses of each rated entity,” said S&P Global Ratings’ credit analyst Paul Watters.
We have taken 39 rating actions related to Brexit risks since we raised our no-deal risk assessment to “high” in October 2018. We continue to track developments but, to be clear, we would not expect a no-deal Brexit to become our base case for rating purposes until it became almost certain.
“Our research shows that the mere anticipation of Brexit following the leave vote in June 2016 has caused the economy to suffer,” said senior economist Boris Glass.
S&P economists now forecast that in a no-deal scenario, U.K. GDP would shrink by 2.8% in 2020. In 2021, output would be 4.7% lower than under our base case, in which the U.K. and EU agreed on a deal. We estimate the U.K. economy lost about 3% of GDP in the 10 quarters that followed the EU referendum, compared to a remain outcome.
Our scenario analysis suggests a no-deal Brexit would do more long-term economic harm than if a deal was reached.
The main rating risks by sector are:
SOVEREIGN
Our ‘AA/A-1+’ sovereign credit ratings on the U.K. already take into account a less predictable policy framework following the 2016 referendum. The outlook on the ratings is negative, reflecting the risk of sustained economic weakness and deterioration in government finances in a no-deal Brexit.
CORPORATES/INFRASTRUCTURE
Potential no-deal Brexit-related risks continue to be a factor in our ratings and outlooks on EMEA-based corporate and infrastructure companies. In a no-deal scenario, we envisage a small number of issuers could face a downgrade, negative outlook, or CreditWatch. The most exposed sectors continue to be automotive, leisure, retail, real estate, aerospace and defense, and transport infrastructure.
FINANCIAL INSTITUTIONS
While UK banks have built resilience, a no-deal Brexit could change our broadly stable ratings assessment. Outlook revisions would be more likely than downgrades in the near term, specifically in the event of a downward revision in the trend for economic and/or industry risk in our U.K. BICRA to negative, from stable. Implications for non-UK banks would be limited.
UK PUBLIC SECTOR
Brexit uncertainty is already weighing on the housing market, as reflected in 11 downgrades or outlook changes on rated housing associations over the past 12 months. Even so, almost one-half the rated portfolio remains vulnerable to a downgrade in the event of a no-deal Brexit scenario. We would anticipate some further weakness in universities’ financial performance as a no-deal Brexit could deter foreign students and academics, particularly from the EU, from studying in the UK.
INSURANCE
The most significant credit implications resulting from a no-deal Brexit for UK insurers are likely to come from the short-term and long-term disruptions to the country’s economy and financial markets. However, we believe the initial impact on UK insurers’ ratings will be muted, with outlook revisions, rather than widespread downgrades, more likely to occur if the downside economic and market scenarios occur.
This report does not constitute a rating action.
