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.
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
U.K. PUBLIC FINANCE
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.
RESEARCH ON BREXIT
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
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