A decision for the UK to exit the European Union ('Brexit') would result in prolonged uncertainty and would be credit negative for UK-based companies such as the auto, manufacturing, food and beverage, and service sectors, says Moody's Investors Service today. Many companies would likely curb investments until the implications of a Brexit become clear for trade, investment, regulations and labour costs.
However, it could take two or more years for the UK to formally exit the Treaty on European Union, during which time Moody's expects that negotiations would progress towards alternate agreements. This period would also allow companies some time to adapt to a post-Brexit operating environment.
Moody's report, titled "Non-Financial Corporates and Infrastructure Companies - UK Brexit Would Create Prolonged Uncertainty Until Alternative Agreements Emerge", is available on www.moodys.com.
"The biggest near-term credit risk from a Brexit for companies is the uncertainty that would follow with regards to trading relations, industry regulations and labour mobility. We expect that some companies would curb investments until there is greater clarity in these areas. However, given the potential two year timeline for a Brexit to take effect, there is likely to only be a few, if any, near-term rating changes," says Richard Morawetz, a Moody's Group Credit Officer for the Corporate Finance Group and lead author of the report.
"In the longer-term, rating changes could be more pronounced if a Brexit became clearly detrimental to trade, investment or labour costs, and ultimately to companies' profitability," adds Mr. Morawetz. Though considering the substantial trade links that exist, there would be strong incentives for both the UK and EU to minimise the effect.
Barring new agreements, EU import tariffs would apply for many UK-based companies post-Brexit, such as a 10% tariff for cars, which would be relevant for auto companies like Jaguar Land Rover Automotive Plc (Ba2 positive) and Aston Martin holdings (UK) Limited (B3 stable). The supply chains of manufacturing companies that import from the EU could also be affected by any new tariff or non-tariff barriers.
Regulatory changes would be significant, but could either be positive or negative in certain sectors where UK regulations are confined by EU directives that require significant investment in water, telecoms and energy infrastruture. For example, in the telecoms sector the EU agreement in June last year to scrap roaming charges for travelers in the EU by 2017 would not automatically apply in the UK if it voted to leave. Although some UK operators, like Vodafone Group Plc (Baa1 stable), have already scrapped the charges.
Any curbs on future labour mobility would affect sectors with the highest share of foreign-born workers, notably food production, business services and retail. However, in the case of retail, the government's introduction of a higher living wage through to 2020 could have a greater effect on wages than a Brexit.
The gaming and tobacco sectors would face little impact from a Brexit. Taxes on gaming are unlikely to be affected, while tobacco companies are global players so any fall out would be too localised to affect their overall earnings.