A potential Brexit on World Trade Organization (WTO) terms will hit the ability of UK transport infrastructure and whole business securitisations (WBS) to recover from the coronavirus pandemic, Fitch Ratings says. The pandemic has reduced the rating headroom of issuers in these sectors and will continue to be the key factor for their performance. However, trade frictions and other pressures from a WTO Brexit will delay the recovery of their credit profiles.
The limited progress in negotiations so far has increased the chance that the UK moves to trading with the EU on WTO terms without a free trade agreement (FTA) finalised when the Brexit transition period ends on 1 January 2021. We expect this to cause near-term operational disruptions in the infrastructure sector with transport credits most affected. We do not expect the adoption of the new trading rules to be straightforward due to the complexity of the change, even though ports, the Eurotunnel and UK airports have made investments preparing to accommodate additional physical and digital border infrastructure.
Fitch-rated WBS credits will be less affected by short-term disruptions. Still, many pubcos are implementing emergency plans for a WTO Brexit, including building up inventories to cover up to six weeks of disruptions and preparing to switch to alternative domestic suppliers if needed.
A WTO Brexit will put pressure on the UK’s economic recovery with the cumulative impact on our GDP forecast for 2021 and 2022 of just over 2pp relative to an FTA scenario. This will translate into lower revenue for most issuers in the sector.
The pub sector is most exposed to those economic pressures among UK WBS subsectors due to the resulting weaker consumer confidence and consumption, leading to reduced pub patronage. This will compound the sector’s structural decline driven by over-supply in the eating-and-drinking-out market. Furthermore, as a result of the coronavirus, most ratings in the sector have already been downgraded by one notch on average and remain on a Negative Outlook, reflecting ongoing uncertainties.
UK ports and airports will also be affected by lower economic activity. Credit profiles of Heathrow, Gatwick and Manchester airports have limited rating headroom, which is reflected in their Negative Outlooks due to concerns about traffic recovery following the pandemic. However, Associated British Ports’ Stable Outlook is supported by its landlord business model with protective contractual arrangements and price flexibility that help mitigate pressures on its cash flow.
Nevertheless, the coronavirus pandemic and the related measures and restrictions in response to the emerging second wave of infections will primarily drive issuers’ performance in the UK transport and WBS sector. Traffic of all transport assets declined to various degrees during the first wave of the pandemic. It started to recover since the strictest rules were relaxed, but renewed measures may put pressure on transport assets’ performance. Similarly, tightened social restrictions could reduce pub patronage. A WTO Brexit would exacerbate these pressures and delay the sector recovery.
Most infra issuers have increased their available liquidity in preparation for the coronavirus shocks by drawing on their revolving credit facilities and arranging new borrowings, including, as in the case of Manchester Airport, new funds from shareholders. These liquidity resources should help cushion short-term disruptions from a WTO Brexit. However, if increasing pressures from the pandemic lead to further reductions in issuers’ cash flow, timely provision of additional liquidity buffers will be key to maintaining the current ratings in the sector.
Source: Fitch Ratings