See below for a roundup of yesterday and this morning’s Brexit news and updates based on our conversations with clients. This includes political and economic, as well as legal and market, developments. We would welcome the opportunity to speak with you about any of this in further detail.
Going forward, we will report on Brexit events as circumstances warrant (not necessarily on a daily basis). Please see here for our Firm’s comprehensive Brexit coverage.
- Stand-off continues between UK and EU regarding possibility of Brexit negotiations before Article 50 notification.
- Surprise as Michael Gove, not Boris Johnson, announces candidacy to replace David Cameron as Conservative Party leader and Prime Minister. Theresa May now favorite to win leadership contest.
- Labour Party in crisis as even Cameron calls for Jeremy Corbyn to resign.
- French President Hollande argues for euro-denominated trades to be cleared on the continent.
- Interest in opportunistic investments into the UK and Europe rises as debt markets show signs of life.
- Banks continue contingency planning for possible loss of EU “passports."
Political and economic developments
- EU leaders have reiterated their position that there will be no informal negotiations with the UK before an Article 50 notice is served. A leaked draft statement of the European Council states that “there can be no negotiations of any kind before the notification takes place.” They are largely united, however, in agreeing that the UK should be given some breathing space before triggering Article 50, although it remains clear that they do not want to wait indefinitely.
- UK constitutional experts continue to debate whether an Article 50 notice can be served by the UK without authorization from the UK Parliament (where a majority of MPs backed Remain).
- Boris Johnson (former London Mayor and Leave campaigner) has decided not to run to become the next Conservative Party leader and Prime Minister, with his Leave campaign colleague Michael Gove running instead. Johnson and Theresa May (UK Home Secretary and Remain proponent), who announced her candidacy this morning, had been the favorites for the position. UK Work and Pensions Secretary Stephen Crabb, former UK Defense Secretary Liam Fox and UK Minister of State for Energy Andrea Leadsom have also announced their candidacies. The deadline for nominations has now passed.
- European Commission President Juncker has stated that Article 50 should be triggered the day after the appointment of a Leave campaigner prime minister (i.e., Gove), but that a Remain proponent prime minister (i.e., May) could politically command more time.
- UK Prime Minister Cameron has directed blame at EU leaders for not accepting further concessions regarding freedom of movement during February’s negotiations. He wants the UK to retain access to the EU single market but not at the price of “movement of people and immigration.” However, during yesterday’s session of Parliament, Cameron conceded that EU leaders had said it would be impossible to have all the benefits of the single market without some of the costs.
- Labour MPs are likely to challenge Jeremy Corbyn for the leadership of the Labour Party. It was thought that possible contenders were Deputy Leader Tom Watson and Angela Eagle, although reports now suggest that Watson will not challenge Corbyn. In a lively session of Parliament yesterday, David Cameron called on Jeremy Corbyn to resign, telling him “for heaven’s sake, man, go.” There were also further resignations by Labour shadow ministers.
- French President Hollande has argued that London should not be able to clear euro-denominated trade following the UK’s withdrawal from the EU. He stated that this would “serve as an example for those who seek the end of Europe”. Hollande also pushed for a new direction in Europe to control borders, enhance investment, and organize the Eurozone in a more democratic way to harmonize fiscal and social policies. Discussions on this are expected to take place in September, before a new strategy for the EU is finalized in March 2017.
- German Chancellor Merkel told the press yesterday that the Brexit vote in the UK would not affect negotiations with the United States on TTIP.
Legal and market developments
Corporate / M&A
- As noted in yesterday’s briefing, we are seeing interest in opportunistic investments into the UK and elsewhere in Europe, seeking to take advantage of market uncertainty and/or the strengthened US dollar. Potential buyers are looking at stepping into hung transactions or broken processes, although current market volatility may need to settle somewhat before concrete steps are taken. We are also seeing interest in investment opportunities in emerging markets (i.e., as an alternative to UK / Europe).
- Among the potential targets of these opportunistic investments are UK publicly listed companies, given the more attractive valuations in light of recent significant share price falls (in particular those with more global asset portfolios). We expect that a number of such publicly listed companies will be reviewing their takeover defenses. Interested buyers are likely to include US corporates with substantial offshore trapped cash.
- We understand that LPs in private equity funds are seeking detailed information on currency breakdowns of portfolio company revenues in order to assess hedging strategies.
- Leveraged finance transactions that signed prior to the Brexit vote are continuing but, where underwritten financings are still to be syndicated, there is a greater focus on accelerating the syndication and an expectation that any “flexit” provisions will be invoked. For those that are continuing, increased pricing and flex rights are being discussed. Non-event-driven corporate finance transactions and corporate re-financings seem to be continuing largely unaffected. Emerging markets have become more of a focus for investors looking to obtain yield.
- We have seen evidence of sterling-denominated LBO funding being committed since the Brexit vote and banks are now being willing to lend. We believe that hesitancy in transactions relates principally to equity valuation, as opposed to debt availability.
- There have been no high yield primary issuances in the UK since the Brexit vote. Most planned high yield issuances have been put on hold until volatility settles, although banks appear to still be willing to consider underwriting high yield offerings to fund acquisitions (but on less issuer-friendly terms).
- We have seen at least one post-Brexit vote risk factor being included in a prospectus in continental Europe, and expect more issuers to do the same. We also expect US public companies to follow suit in the next quarterly reporting period with MD&A and risk factor disclosure tailored to their particular Brexit exposures (operational, people-driven, currency-related or otherwise).
- UK banks and non-EU banks with substantial UK subsidiaries are continuing to assess their options for providing services into the EU in the event that they lose their “passports,” including considering what business relocations might be desirable and how any such relocations might be structured.
- We are similarly seeing a number of asset managers considering options for possible co-location and/or relocation of activities to a continuing EU country (e.g., Ireland or Luxembourg).