UK: Plotting A New Course: Brexit – The Financial Advisory Perspective

Last Updated: 11 July 2016
Article by Deloitte LLP

Uncertainty

The obvious statement is that the UK's vote to leave the EU creates a period of uncertainty. That period could be quite long as detailed negotiations are unlikely to start until September 2016 and once Article 50 is triggered there is a two year negotiation period (unless all EU countries agree to extend it).

The key uncertainties are the lack of clarity over the UK's future trading relationships in goods and services (including financial services) with Europe and the rest of the world, the changes required to UK legislation where it has followed EU laws and the changes in rules on freedom of movement of people.

There are many potential models which are being discussed and until there is some political stability and importantly a new Prime Minister to set a negotiating strategy the picture will not become clearer.

It is likely that the period of negotiation and preparation for Brexit will cause significant distraction for the Government and businesses which will result in other issues receiving less attention. This will only be compounded if there is a second Scottish independence referendum.

Confidence

The Deloitte quarterly CFO tracker showed that business confidence was already falling ahead of the vote and it is likely to fall further now the vote is confirmed. The declines in the stock market point to that effect and the expectation of lower growth in the UK. A week on from the vote the FTSE 100 has recovered its losses but the FTSE 250 is down 7.7%, with substantial variations by sector (see below).

Strong consumer confidence has been an important growth factor for the UK economy. There are some early signs that consumer confidence has been dented by the aftermath of the vote. If that develops it would be negative for economic growth.

M&A Activity

The immediate impact of a reduction in confidence and increase in uncertainty is likely to be a pause in investment activity, including some M&A. Our clients' views on the impact on M&A are evolving. There is inevitably some macro reaction to investing in the UK at this time but clients are trying to look through that and understand the more nuanced issues about how targets will be impacted.

In general more domestic situations are seen as less likely to be affected whereas those with large overseas supply chains or significant overseas trade are more likely to be affected. Whilst we have seen some deals pause we have closed a number of M&A deals in the past week and the current pipeline of mandates appears robust. There is some evidence that overseas purchasers may see the decline in sterling as an opportunity to buy cheaper UK assets.

Debt markets

A key issue for how significant the implications of Brexit will be for the economy is the reaction of debt markets. If the availability of credit for consumers or corporates change significantly then the near term impact on corporates will be much more severe. Immediate feedback from our team is that the debt markets remain open for business and we are moving forwards to complete a number of mandates. Indeed some alternative lenders see this as a further catalyst for the move towards non-bank lending.

Currency markets

The foreign exchange markets have also reacted strongly. Against their last 12 month average the Sterling to Euro and Dollar exchange rates both closed down c. 9.8% on 29th June 2016 (see below). We would expect a decline in sterling to lead to higher inflation which could be countered by interest rate rises. A rise in interest rates at this time would be very challenging for the economy and it actually appears that the Bank of England is more minded to cut rates. There is also talk about policy responses to support the economy to limit contagion type issues.

Impact on different sectors

Not all sectors will be significantly impacted by Brexit and we believe that the impacts will be felt over a number of time horizons. In particular in terms of whether distress emerges we believe that:

  • In the next 3-6 months businesses are most likely to encounter distress either if they are exposed to unhedged forex risk that impacts trading or financial covenants or alternatively if they were progressing a stressed/distressed M&A transaction or debt refinancing that has been halted.
  • In the following 24 months as Brexit is negotiated the trading impacts of any weakness in consumer confidence or business investment will be felt through covenant issues or liquidity challenges. There will of course be export led businesses which see strong benefit from sterling depreciation.
  • Post Brexit implementation the impacts of different trading regimes in goods, services and financial services will be felt alongside any changes in EU subsidy arrangements.

We have analysed the share price share price movement of different sub sectors or constituents of the FTSE all share between the close on the 23rd June 2016 and 29th June 2016.

In the travel sector airlines have shown substantial falls (c.30%). This illustrates the exposure to exchange rates as airlines pay for aircraft leasing, maintenance and fuel in $ but earn revenue in £ or € and to consumer demand. Other travel and leisure companies also show falls (c.6%) but this is more likely to reflect the changed sentiment towards the domestic UK economy.

Similarly retailers that source product in $ but earn in £ and cannot pass the cost increases through to customers will be impacted if unhedged. The declines in the stock market point to these affects with general retailers (c.13%), which frequently source overseas in $, falling further than the food retailers (c.2%).

As evidenced by the substantial share price falls the financial services industry and banks in particular (c.25%) are likely to be most affected by the changes in regulation as a result of Brexit because of potential changes in passporting rights, regulation and capital requirements, the impact of lower interest rates on their lending margins and lower domestic economic growth. However, without a clear view on the future framework it is impossible to judge the extent of the impact.

The real estate sector has seen substantial falls in share prices (c.17%) particularly amid concerns over London commercial and residential development and investment valuations given Brexit risk. Critically developments not yet started have the potential to be delayed pending greater clarity around the political and economic landscape with consequential impacts on construction. The decline in sterling does appear to create an opportunity for some overseas investors which acts as a counter- balance.

Other businesses will be impacted by changes in EU funding, for example agriculture is a major recipient of EU subsidies which will cease on exit with no clarity on any replacement funding. That uncertainty is likely to impact investment and land prices prior to exit.

The automotive sector is heavily exposed to the future trade arrangements. There is unlikely to be immediate impacts given investment cycles but medium term there could be a real impact on automotive activity and the associated supply chain. There are, however, very few quoted UK companies in the automotive sector.

Priority responses

Our conversations with clients are covering a broad range of areas. The key themes we expect to emerge are:

  • Treasury Management – Responding to the impact of changes in exchange rates and hedging costs.
  • M&A Outlook – Responding to the changed circumstances and its impact on existing M&A activity or strategy.
  • Performance Improvement – Where an M&A process has stalled companies are focusing on improving cash flow to growth value or in some circumstances avoid distress.
  • Supply risk mitigation – Groups are assessing their exposure to the risk that elements of their supply chain may be exposed by Brexit.
  • Location strategy – Brexit is causing companies to assess whether the UK is the right location for their business or future investment.
  • Managed exit – Where companies are considering exiting an element of their activities which may require evaluating and implementing a solvent wind down.
  • Financing Options – Addressing debt raising requirements or managing the impact of financial covenant breaches or liquidity shortfalls.
  • Financial distress – Where the direct or indirect consequences of Brexit are causing a threat to survival.
  • Investigations and disputes – Where as a result of the various changes leading to re-writing and re-negotiation of contract and resultant disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions