Ports and airports would feel the heat in a 'No Deal' Brexit scenario

Ports and airports would be most vulnerable in a "no deal" Brexit scenario in the infrastructure and whole business securitisation sector, with traffic declines and increased costs putting pressure on cash flows, according to new research.

In a note flagging Brexit vulnerabilities for the sector, Fitch Ratings said, "Political divisions within the UK and slow progress in negotiations with the EU mean there is a wide range of potential Brexit outcomes. A no deal Brexit would substantially disrupt customs, trade and economic activity. The UK economy could see weaker near-term growth or even contract as a result, and sustained sterling depreciation and increased inflation."

It added that less-liquid capital markets could increase refinancing costs.  

Fitch also said short-term effects include immediate trade and travel disruptions on Brexit day that would notably affect Channel Link (CLEF), ports (ABP) and airports (Heathrow, Gatwick, Manchester Airport Group) as World Trade Organisation (WTO) tariffs are levied, immigration controls implemented and airplanes are possibly grounded if permissions and certifications to operate flights to the EU have not been secured.

"In the medium term, weaker economic growth, a reduction in immigration, falling consumer confidence, higher inflation and sterling depreciation may contribute to lower traffic and adversely affect ports and airports revenues. Inflation-linked pricing may reduce the impact on revenues of ABP, Heathrow, Gatwick, and THPA, although this could be offset by inflation-linked debt for Heathrow, ABP, and Gatwick. Furthermore, ABP, Gatwick and MAG benefit from long-term contracts with revenue protection, which may offset some volume declines," said Ian Dixon, Managing Director of Infrastructure at Fitch Ratings. 

The patronage of pubs could decline as a result of falling consumer confidence and a weaker pound, making it most affected in the whole business securitisation (WBS) segment. Pubs and leisure services have benefited from the freedom of movement of labour within the EU. Restrictions could reduce the labour supply and increase wage cost pressure, given low levels of unemployment in the UK. Some businesses may shift food and drink suppliers to the UK from EU to mitigate the impact of sterling depreciation and of potential tariffs on imports.

WBS transactions typically benefit from fully amortising debt, which removes refinancing risk. Punch Taverns Finance B Limited is the only WBS transaction exposed to refinancing risk. Refinancing could also become more challenging for infrastructure deals with bullet maturities if capital markets tighten in the event of fractious Brexit negotiations.