A ‘no-deal’ Brexit would be ‘credit negative’ for European aerospace and defence companies in the short-term, with the smallest companies most affected by the disruption. This is according to a new report from Moody’s Investors Service.
Moody’s believes that the United Kingdom and the European Union will reach an agreement that preserves many of their current trading arrangements, minimising the impact on European aerospace and defence companies.
However, it argues that a ‘no-deal’ Brexit scenario will remain a threat until tan official agreement is reached.
“The risk of a ‘no-deal’ Brexit scenario is increasing and will remain a significant near-term threat to the aerospace and defence industry until a withdrawal agreement with transitional arrangements is signed,” said Jeanine Arnold, a Moody’s Vice President, Senior Credit Officer and author of the report.
What could go wrong?
Trade disruption will pose a significant near-term risk in the event of a ‘no deal’ Brexit as the European aerospace supply chain is highly integrated, complex and already strained, Moody’s warns. Specific issues could be lengthy border checks that could delay deliveries of commercial aircraft, military equipment, their parts and components, as well as greater demands on working capital.
Although the UK is seeking to remain a member of the European Aviation Safety Agency (EASA), ‘a no-deal’ Brexit scenario heightens the risk that it may be excluded. Such an outcome would mean that UK companies would no longer be covered under existing regulatory approvals.
“Given the substantially negative fallout this would cause the industry in Europe, we would expect the EU to take measures to limit this risk,” the Moody’s report says.
The report also warns that the increased trade barriers and any restrictions on the movement of people could prompt aerospace and defence companies to consider changes to their manufacturing footprint, although such outlays would likely be made over the longer-term because of the significant costs and planning needed to transfer manufacturing sites.
Who will be affected?
Moody’s warns: “Smaller aerospace and defence companies would be hardest hit by a no-deal Brexit because they would lack the scale, resources and liquidity to manage abrupt swings in working capital, relocate personnel and manufacturing sites, or invest in IT systems and additional overheads to deal with the added administrative burden of trade barriers.”
Of the large companies Moody’s rates, it says Rolls-Royce plc (A3 negative), Airbus SE (A2 stable) and Leonardo S.p.A. (Ba1 positive) would be most affected by a no-deal Brexit due to their UK sales exposure, the location of their manufacturing facilities, or risks to their ability to retain certifications.