Fitch: Brexit currency moves to hit UK retailers and airlines


Retailers and airlines will suffer from a weak pound if they cannot limit currency impacts on the cost of imported goods or rebalance capital structures, ratings agency Fitch says.

Companies would face ratings pressure if the pound were to drop 10 per cent more from the approximately 10 per cent drop it’s already seen in the period since the UK voted to leave the European Union.

The pound recovered slightly today to just under $1.30 on news Theresa May will become the UK’s next prime minister following David Cameron’s resignation the day after the 23 June referendum.

In a sample of UK corporates, Fitch lists New Look and Tesco among the most exposed to weaker sterling on an unhedged basis. British Airways, Sky, Marks and Spencer and BAE Systems are also vulnerable.

Thomas Cook, on the other hand, could benefit from servicing GBP-denominated debt from euro revenues.

Fitch calculates under existing currency rates New Look’s unhedged leverage should increase 5.1x and 30.6x if sterling were to drop a further 10 per cent.

Tesco, which generates three quarters of its revenue in UK pounds, while half its costs are in foreign currency, would see its unhedged leverage increase 1.3x under existing currency rates and 4.2x if sterling were to fall a further 10 per cent.

Airlines will also suffer from a weak sterling due to a large share of aircraft financing being in US dollars. Fitch says the impact on British Airways is partially mitigated because around half of its revenue is generated in currencies other than sterling.

Fitch says FX hedging, where companies buy currency forwards to provide foreign currency access at a fixed rate, would mitigate short-term impacts, but generally only cover a six to 12 month period.

The report says large retailers would be able to source from cheaper locations or locally produced goods, but independent or specialist retailers may face failure due to “extremely competitive” trading conditions and their relative lack of bargaining power.

The report says “in theory” companies could increase overseas sales, but this assumes their products would be required in the world market and that they had the capacity to increase volumes. It added that exporters would have to seek markets where demand is strong rather than the “fragile European market”.

Fitch expects a “mild upward trend” in prices for consumers, forecasting CPI growth of 2.6 per cent in 2017 compared to 0.8 per cent anticipated in 2016.

Deutsche Bank last week forecast that the pound could fall to $1.20, while Allianz chief economist adviser Mohamed El-Erian said the UK government “urgently” needed to establish a post-Brexit plan to avoid reaching parity with the dollar.