Announcement: Moody's: UK companies' credit quality will remain stable in 2018, despite Brexit uncertainty

The credit quality of UK non-financial companies will remain broadly stable in 2018, despite uncertainty stemming from the Brexit negotiations, Moody's Investors Service said in a report today.

"UK economic growth will slow in 2018 due to Brexit uncertainty and weak productivity growth but we expect the effect on companies' credit quality to be cushioned by strong liquidity and low funding costs," said Colin Vittery, Vice President - Senior Credit Officer and the report's co-author. "Any tapering of quantitative easing by either the Bank of England or the European Central Bank is expected to be measured and will not have a material negative impact on credit markets in 2018."

Moody's central view remains that some form of a free trade agreement covering goods will ultimately be reached because it is in the interests of both the UK and the European Union. This would partly offset the negative economic impact of the UK leaving the EU.

Although the Brexit talks are likely to create some volatility in credit markets, Moody's expects steady debt issuance in 2018, supported by refinancing and resurgent M&A.

While the Bank of England forecasts a measured rise in the UK base rate from 0.5% to 1.0% by 2020, the refinancing of the speculative-grade maturity wall to 2022 will insulate issuers from the rising rate environment for a number of years.

Funding will continue to be supported by measures taken by central banks, but rising rates may relieve some pressures driving low discount rates, which are used to calculate UK pension liabilities.

On sector specific fronts, sterling's weakness has led to inflation outstripping wage growth, with the resultant squeeze on disposable incomes curbing consumer confidence. The ongoing shift towards online shopping will continue to weigh on the earnings growth potential for bricks and mortar-focussed retailers, given the inflexibility of their store cost bases.

However, Moody's is more optimistic for the earnings growth potential of grocers than, for example, traditional clothing retailers given the relatively inelastic demand for food, and the far higher and rapidly growing, penetration of online fashion spending.

For utilities and infrastructure, regulatory announcements affecting retail energy supply, water, energy networks and airports are all expected in 2018 and Moody's anticipates a tougher regulatory price regime to emerge. In the UK commercial real estate sector, Moody's also expects Brexit uncertainty to dampen sentiment, investment volumes and occupational demand. Prime real estate is forecast to be stable, but more secondary properties will be subject to value declines.

Moody's expects the UK telecoms market to provide a stable credit environment for the major participants: BT, Vodafone and Virgin Media, which benefit from large scale and strong market positions, but which at present have limited financial flexibility.