Project finance transactions in the UK are unlikely to be negatively affected by the country’s decision to leave the EU and the possible fallout resulting from that decision, S&P said in a report.
“We have analysed the effect of Brexit on our UK portfolio of over 50 rated transactions, in particular the potential repercussions of a higher inflationary environment, weaker economic growth, and the change in the credit quality of revenues and financial counterparties,” the ratings agency stated. “While we believe that the risks of adverse economic developments in the UK have increased, we expect UK private finance initiative (PFI) projects will maintain their credit strength.”
In regards to availability-based projects that are not exposed to volume risk, S&P believes they will be largely unaffected by higher long-term inflation forecasts (as measured by the retail price index). “The unitary charge of these projects is typically inflation-linked and will offset the impact of any inflation-linked operating cost increases,” S&P stated.
Projects exposed to market risk also should not be affected by the expected decrease in UK GDP growth, but could benefit from a higher inflationary environment since projects, such as student housing or toll roads, will also see an increase in rents and toll rates.
“On the other hand, volume-based projects could be more vulnerable to rating changes if a recession were to materialise and lead to weaker market demand,” the ratings agency noted.
While the majority of S&P’s UK portfolio has not been affected, five projects were negatively impacted due to recent downgrades on a number of UK banks last month.
As a result, S&P has changed its outlook to negative from stable on the Alpha Schools (Highland) Project, Aspire Defence Finance, Consort Healthcare (Salford), Consort Healthcare (Tameside) and Integrated Accommodation Services. Debt issued by these issuers remained unchanged.
“The outlook revisions reflect our view that we could lower the ratings on these transactions if we downgraded the financial counterparty to which they are linked,” S&P said.