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October 21, 2020updated 16 Jun 2021 2:13pm

No deal Brexit could be more negative on UK automaker credit quality than COVID-19 – Moody’s

A no-deal Brexit could have a long-lasting negative impact on UK automakers as permanent tariffs, trade barriers, and currency depreciation come into force, Moody's said in a report.

By Olly Wehring

  • Potential tariffs pose further challenges for automakers trying to restore credit quality and ratios
  • Subdued domestic demand unlikely to balance negative effect

A no-deal Brexit could have a long-lasting negative impact on UK automakers as permanent tariffs, trade barriers, and currency depreciation come into force, Moody’s said in a report.

Immediate disruptions and additional costs are expected for UK automakers as they execute their no-deal Brexit contingency plans although the impact of reduced demand as a result of the pandemic will have a much greater effect on their financial performance in the next 12-18 months.

“In the event of a no-deal Brexit, domestic demand is unlikely to offset the profit pressures UK automakers will face as tariffs, trade barriers and currency depreciation come into play. The UK economic environment is already uncertain, and a no-deal Brexit would only exacerbate this further, creating more challenges for carmakers,” said Moody’s senior credit officer Tobias Wagner.

While sustained sterling depreciation would dampen the negative effects of tariffs, the currency effects would eventually flow through despite hedging strategies.

Permanent trade barriers would erode the profitability of UK car manufacturers, such as Tata Motors’ Jaguar Land Rover Automotive, Aston Martin Lagonda Global Holdings and McLaren Holdings, with tariffs making restoring credit ratios and credit quality for these companies even harder after a very weak 2020.

Similarly, international auto manufacturers’ risk varies relative to exposure, with BMW the most exposed European manufacturer to a no-deal Brexit.

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Nissan Motor, Toyota and Honda also find themselves out on the frontline, Moody’s said.

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