UK Potential Ban On Israel Exports: More Bans Could Impact Leonardo

UK ex-Supreme Court justices et al. lobbing UK government to stop Israel arms exports. Leonardo appears key EUR issuer with exposure if creeping European bans are implemented. Our political risk analyst sees as a c.30% probability of a UK ban.

• BBC is reporting that 600 lawyers, including three ex-Supreme Court justices, have written to UK Prime Minister Sunak over potential breaches to international law and the Geneva Convention allegedly being perpetrated by Israel. They argue this should drive a ban on UK arms exports there. Similarly, a Dutch court of appeal has ordered a halt to F35 parts exports.
• Pressure is clearly growing and our political risk analyst, Tom Lake, makes the point that the “prospect of a ban is at its highest to date”. Our analyst further notes US Foreign Secretary Cameron is at the NATO summit today so would likely be in the press spotlight and sees a ban as having a c.30% probability.
• From a credit perspective, the key arms suppliers globally are the US majors (Boeing, Lockheed Martin, General Dynamics, Raytheon and Northrop Grumman) who appear very unlikely to halt exports. In Europe, Leonardo is the key name in focus as potentially at risk from European banks, alongside companies like BAe Systems (not a Euro issuer) and Meggitt (owned by Parker-Hannifin, has one EUR line: PH 1.125% 03/01/25).
• Leonardo, whose equity is up 70% from Oct-23 (20pp outperformance vs. SXXP), has seen spreads tighten 20-40bp YTD, actually less than industrial peers and, if export bans start to be implemented across Europe, this could see those spreads widen again.