Tuesday, 28 June 2016

S&P Global Ratings Comments On Brexit Vote

Following the United Kingdom's (U.K.) referendum decision to leave the European Union ("Brexit"), S&P Global Ratings said that it would be reviewing the ratings potentially affected by the referendum result.
Despite the "leave" vote, any exit will likely be a drawn-out process while 
treaties or other arrangements are negotiated between the U.K. and the EU 
regarding their future dealings. As we have stated over the last several 
months, certain ratings may be affected sooner including the sovereign rating 
on the U.K. as well as the ratings on entities directly linked to the U.K. 
sovereign rating. 
As we stated in our recent research update on the U.K. (April 29, 2016), a 
vote to leave would, in our view, deter investment in the economy, decrease 
official demand for sterling reserves, and put the U.K.'s financial services 
sector at a competitive disadvantage compared with other global financial 
centers. We stated that a vote to leave could affect growth performance, 
external funding, and the public balance sheet, adding that--depending on the 
circumstances and consequences of a leave vote--we could lower the rating by 
more than one notch if we believed that the U.K.'s institutional strength and 
ability to formulate policy conducive to sustainable growth were negatively 
As we have previously stated, the leave vote has no immediate impact on the 
ratings on U.K. domestic commercial banks. We see the effects of a leave vote 
on these banks as indirect, arising from potential adverse consequences for 
economic activity, new business volumes, asset prices, and demand for 
U.K.-related debt. U.K. banks' liquidity buffers provide a sizable cushion 
against market volatility as does the Bank of England's previously announced 
contingency measures to ensure sufficient banking system liquidity. That said, 
volatility may interrupt wholesale debt issuance and affect the values of 
financial assets in the near term.
In the coming weeks, we will closely assess developments and update U.K. 
commercial bank ratings as necessary. Since mid-2015, we have not included 
government support in our U.K. commercial bank ratings. As such, any changes 
in the U.K. sovereign credit rating would not automatically affect such 
The leave vote is not expected to lead to rating actions on U.K. insurers.
We see the insurance sector as less exposed to the leave vote than the rest of 
the financial sector. While representing about one-third of the U.K.'s very 
substantial financial services net export surplus, the insurance sector is far 
more reliant on trade with non-EU countries--especially the U.S. The sector is 
also a very limited recipient of inward investment.
The nature of any future trading relationship between the U.K. and the EU is 
yet to be established. However, even in the absence of any trade agreements or 
passporting rights, we believe that U.K. insurers operating in the EU could, 
through appropriate planning, continue their businesses largely uninterrupted. 
The same would apply for EU insurers who currently trade in the U.K. through 
The period of uncertainty while treaties or other arrangements are negotiated 
between the U.K. and the EU could weigh on insurers' investment returns and 
possibly on the rate of future economic growth. However, we do not now believe 
that these potential issues are likely to lead to immediate rating actions on 
The credit implications for U.K. corporates of an exit from the EU would vary 
considerably by company and industry, with many of the decisive parameters 
unlikely to be determined until withdrawal terms are settled. This is likely 
to take several years.
While we expect considerable foreign exchange volatility, a slowdown in 
inbound foreign direct investment, a weakening of real estate markets, and 
some loss of business and consumer confidence in the immediate aftermath of 
the leave vote, we believe that longer-term credit performance will mostly 
depend on medium-term domestic and global economic performance and specific 
arrangements for goods and services trade, regulation, taxation, competition 
policy, and freedom of movement. A curtailment in corporate investment in the 
U.K. over the medium term is a key concern as that would likely weaken 
innovation, slow improvements in operating efficiency and, ultimately, impair 
the competitiveness of British manufacturing and service industries versus 
peers abroad.
Many of our ratings on U.K. local governments and other public bodies benefit 
from our assumption that the U.K. government would be willing and able to 
provide extraordinary support to avoid a payment default by such bodies. That 
assumption extends to sectors, such as social housing, where many of our 
ratings include one notch or more for government support and mirror that of 
the sovereign. Highly rated U.K. local governments are in a similar situation. 
Therefore, while any direct impact from a leave vote is likely to be modest 
and only materialize over time, we are likely to lower the ratings on a number 
of these bodies following a sovereign downgrade.
We do not expect an immediate impact on the ratings on U.K. structured finance 
products. However, we expect an uncertain time, possibly as long as several 
years, for the U.K. and Europe. The macroeconomic reaction to the exit is 
going to be the main factor that could potentially impact the ratings. 
Specifically regarding commercial real estate, depending upon the market's 
reaction, the exit could simply lead to a slight dip in U.K. migration or 
could involve some corporate office diversification toward Europe. We expect 
any impact will be mostly felt in London in the office-space market, with some 
small potential effect on residential housing.
As previously stated, the leave vote will not directly affect our credit 
analysis of the underlying collateral backing U.K. covered bonds. Furthermore, 
a possible depreciation of sterling will not, in our view, alter the capacity 
of covered bond issuers to meet their payment obligations.
All our published research on Brexit is available at www.spratings.com/brexit.
Only a rating committee may determine a rating action and this report does not 
constitute a rating action. 
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's 
leading provider of independent credit risk research. We publish more than a 
million credit ratings on debt issued by sovereign, municipal, corporate and 
financial sector entities. With over 1,400 credit analysts in 26 countries, 
and more than 150 years' experience of assessing credit risk, we offer a 
unique combination of global coverage and local insight. Our research and 
opinions about relative credit risk provide market participants with 
information that helps to support the growth of transparent, liquid debt 
markets worldwide.