The downgrade reflects a significant weakening of the UK's public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent. The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship.
The effect of post-Brexit developments in the UK-EU relationship on the UK's economy and public finances will remain an important factor in our UK sovereign rating assessment after the UK leaves the EU on 31 January.
The UK's major banks face the challenges of Brexit from a position of strength. The uncertainties in relation to the UK's exit from the EU remain material but the banks are well-capitalised, impaired loans are at a cyclical low and liquidity buffers are sound. Net profitability is still under pressure but the end of PPI-related customer redress will soon remove a major drag on net income, and cost-cutting continues.
The increased threat of the UK leaving the EU without an agreement is causing a divergence in investment decisions among UK auto manufacturers. Some companies have announced a potential reduction in their investment, while others are boosting capacity.
The election of Boris Johnson as leader of the UK Conservative Party further increases the risk of a no-deal Brexit, but domestic political outcomes, and therefore the timing and nature of the UK's exit from the EU, are still highly uncertain. Johnson was confirmed as the new party leader on Tuesday following a ballot of party members, and will likely be asked to form a government on Wednesday.
EMEA airports' credit profiles are likely to remain resilient despite slowing growth and Brexit-related risks. We expect risks of airline consolidation to be contained, but with secondary hub airports in particular facing higher chances of permanent passenger losses following any key airline bankruptcy.
UK challenger banks may be more vulnerable than more established banks to late-cycle and Brexit-related risks. Several challenger banks have grown faster than the market, and faster than GDP, during relatively benign credit conditions in recent years, with performance not yet tested in a downturn.
Rated UK transport infrastructure issuers are generally well placed to weather short-term disruption in traffic and trade flows in the event of a "no-deal" Brexit thanks to their robust liquidity positions and financial flexibility. The longer-term impact is more uncertain but weaker macroeconomic factors could reduce traffic, and hurt revenue, EBITDA and financial metrics.
UK pub and leisure issuers are vulnerable among whole business securitisations (WBSs) to a no-deal Brexit due to revenue and cost pressures. Short-term shocks are likely to be offset by stockpiling, comfortable liquidity positions and balance sheet flexibility, but a dampening effect on the UK economy could hurt UK WBS issuers in the medium and long term.
The European Union and the European Investment Bank's 'AAA'/Stable ratings would not be affected by a no-deal Brexit. The EIB is expected to benefit from full replacement of the UK's capital, while short-term risks to the EU budget are manageable.
The BoE's rating reflects its central role in the UK and international financial system. The rating is underpinned by support from the UK sovereign. The near certainty of sovereign support for the BoE derives from its national strategic importance, as well as ownership by the UK Treasury.
With the UK's decision to leave the EU coming to a head, Fitch believes US banks active in Europe are well prepared operationally for any potential outcome, and that Brexit is unlikely to be a ratings or credit issue. US banks have largely updated their legal entity structures to be able to continue to conduct normal business operations and service clients in the UK and EU post Brexit.
Investors in open-ended UK property funds face a growing risk that the funds will prohibit withdrawals by imposing redemption gates as a reaction to market fears that property values will fall because of Brexit.
The tougher operating environment in 2019 is likely to exacerbate liquidity woes of those European airlines that are highly leveraged, prompting defaults or M&A. Recent airlines' bankruptcies, including Flybmi this weekend, and sale attempts support our view that fierce competition, Brexit uncertainty, and oil price and currency volatility will continue to threaten financially weaker airlines and drive further consolidation.
James McCormack, Global Head of Sovereign Ratings at Fitch Ratings, talks about the Brexit negotiations and the implications for the UK economy. He speaks with Manus Cranny on Bloomberg Daybreak: Middle East.
Fitch Ratings’ UK international scale public credit ratings can continue to be used post-Brexit for regulatory purposes in the EU, and its EU international scale public credit ratings can similarly be used for regulatory purposes in the UK, even if there isn’t a Brexit agreement between the UK and EU. We have produced an FAQ document explaining how we have responded to Brexit in order to minimize its impact on the users of our ratings, as well as our business and employees. FAQ: Brexit Impact on Credit Ratings Agencies