Economic recovery, strong liquidity and low funding costs, supported by both the Bank of England’s and the European Central Bank’s expanded quantitative easing programmes, will broadly stabilize UK non-financial corporates’ credit quality in 2017 despite the negative effect ofBrexit uncertainty, says Moody’s Investors Service in a new report.
Moody’s report, titled “Corporate Credit Quality in the UK: Credit Quality to Remain Stable Despite Slower Economic Growth Due to Brexit Uncertainty “, is available on www.moodys.com and is one of a series of four (including Sweden, Germany and Spain) tackling the main issues that Moody’s expects to affect corporate credit quality in European countries in the next 12 months.
UK debt issuance will remain steady in 2017 with speculative-grade issuers’ use of loan structures increasing, as the historical distinctions between loan and bond terms diminish.
Credit quality in the UK utility sector will remain stable in 2017 supported by the benign regulatory environment, but the property sector faces uncertainty. Property market fundamentals are strong at present, but the consequences of Brexit could hurt demand in the London office segment when more office space comes to market over the next two years.
Intense competition, slow demand growth and cost inflation exacerbated by the depreciation of UK sterling will place pressure on the UK retail sector’s credit quality in the year ahead. Retailers’ margins will shrink after pre-Brexit foreign exchange hedging expires and costs jump for products sourced overseas.
The weak pound is less of a concern for food retailers because they source around half of their products from UK manufacturers, whereas most clothing is manufactured overseas. Price war escalation among supermarkets remains a risk, but ongoing strategic initiatives will likely improve profits at Tesco Plc (Ba1 stable) and Wm Morrison Supermarkets plc (Baa3 stable) from recent lows.
Following several years of fierce competition, consumer upsell will drive an improved environment in the UK telecom sector with sustained price increases from “more for more” offers flowing through to EBITDA due to positive operating leverage.
The UK media market will continue to see telecom, broadband, TV content and cable converge as operators seek to offer a full suite of products. This may lead to disruptive competitive responses from weaker operators. Media corporates with a UK demand focus, such as ITV plc (Baa3 stable), will likely remain challenged by reduced advertising rates.