The UK’s vote to leave the EU has far-reaching implications for businesses and financial markets. In this briefing, we look at how the UK’s withdrawal from the EU (Brexit) may affect the corporate treasuries of UK and EU businesses.
Economic outlook, with improved technical factors for corporates
Longer term, some commentators believe the vote to leave will have a negative economic impact for the UK as a whole. On a more micro level, a number of technical factors have improved for corporates. UK companies with overseas operations, especially in emerging markets, benefit from the weaker pound when converting profits back into sterling. Low interest rates keep financing costs down. Some corporates may be looking at enhanced conditions to execute strategic acquisitions. Since the vote, corporate refinancings and new money deals have closed successfully, and new transactions have commenced.
A prolonged period of uncertainty
The referendum result has not triggered any sudden change to the UK’s legal status as an EU member state, but there is no doubt that Britain faces uncertain times. It is unclear when the UK Government will invoke the Article 50 withdrawal process or with what objective. The specific terms of a UK exit, the future shape of UK regulation and laws replacing existing EU laws all remain to be seen.
Hot topics for corporate treasurers
Against this backdrop of market volatility, political turbulence and potential economic downturn, we believe that corporate treasurers will need to consider:
- the potential impact of the loss of the EU ‘passport’ by any of the group’s UK bank counterparties;
- the likely end of the ‘one-stop shop’ with UK banks potentially unable to continue offering a full range of banking services in the EU;
- the location of group bank accounts and whether cash pooling regimes may need to be reorganised;
- the impact of the uncertain regulatory framework for swaps and the derivatives market as a whole, including future regulatory requirements for intra-group positions;
- the micro effects of macro-economic factors – how the devaluation of sterling and reduction in interest rates may impact debt documentation and the negotiation of financing;
- whether the group could be exposed to withholding tax risk when certain EU directives cease to apply to the UK on Brexit;
- as the post-Brexit landscape becomes clearer, the need for ongoing review of contractual terms in debt documentation and, for corporates active in the capital markets, adapting to the future regime for prospectus recognition and regulation;
- the location and future mobility of treasury staff and services; and
- how Brexit will shape longer-term treasury policy.