Moody’s assesses Brexit’s credit impact on UK debt issuers

The UK’s decision to leave the European Union (EU) has credit implications for many of the country’s debt issuers, as the prolonged period of uncertainty facing the country will weigh on economic growth and increase financial market volatility, says Moody’s Investors Service.

In its newly-published report, entitled ‘Assessing the Immediate Ratings Impact of the UK’s Vote to Leave the EU’, the credit ratings agency (CRA) assesses the new credit landscape that has emerged since the June 23 referendum. It summarises rating actions already taken by the rating agency since the result was declared a week ago, but does not announce any new rating actions.

Since the referendum result, Moody’s has:

• Revised the outlook on the UK sovereign rating to negative from stable and affirmed the rating at Aa1. The negative outlook reflects the UK’s weaker medium-term growth outlook and diminished policy predictability and effectiveness, both of which will weigh on the government’s fiscal consolidation plan.
• Changed the outlooks on the ratings of the Bank of England (BoE) and the Isle of Man to negative from stable and affirmed both ratings at Aa1. The outlook changes reflect the entities’ close economic, financial and institutional linkages with the UK sovereign.
• Changed the rating outlooks on 52 UK sub-sovereign entities to negative from stable. These include local authorities, Transport for London (TfL) and housing authorities. The outlook changes reflect, in part, the direct implications that the sovereign outlook change has for sub-sovereign entities, given their strong economic, financial and institutional linkages.
• Changed the outlooks on 12 UK banks and building societies to reflect the expected reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.
• Revised the outlooks on six insurance groups due to rising concerns over business growth potential and profitability, as well as the impact of financial market volatility on their capitalisation.
• Revised the outlook on four UK infrastructure and project finance issuers, reflecting the fact that their debt benefits from a guarantee provided by the UK government.
• Changed the outlook on one UK non-financial corporate to negative from stable.

In total, Moody’s has changed 74 rating outlooks to negative from stable; changed four outlooks to stable from positive; affirmed 12 ratings with no change to the outlook and affirmed two provisional and short-term ratings which have no outlook. Details of the rationale behind the changes and a table summarising all the actions are contained in the report.

After the referendum, Moody’s revised down its UK gross domestic product (GDP) growth forecasts to 1.5% and 1.2% for 2016 and 2017, from 1.8% and 2.1% previously.

“Our expectations of a weaker economic and financial performance in the UK will have material credit implications for the country’s broader rated universe,” said Colin Ellis, Moody’s chief credit officer for Europe, the Middle East and Africa (EMEA) and co-author of the report.

“We expect a prolonged period of uncertainty in the UK following the vote and we will continue to monitor developments as they unfold.”

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