While the U.K. is scheduled to quit the European Union in March 2019, Brexit negotiations are moving at a glacial pace, leaving the details surrounding the U.K.’s departure unclear. In fact, at this point, the only thing that seems clear about the U.K.’s split with the EU is the considerable uncertainty involved.
Not knowing what is going to happen is what's difficult for corporate treasuries, said Damien McMahon, a partner in the finance and treasury management practice at PwC. “Once it’s announced, then we can plan for it, then we can hedge it. When it’s undecided, that’s the difficult period.”
U.K. Prime Minister Theresa May recently proposed a two-year transition period that would allow the U.K. to remain in the single market through 2021.
Markus Ohlig, a managing director at Greenwich Associates, said that while the prospect of a two-year transition “gives a little bit of comfort,” the pace of negotiations has been far slower than companies would like.
“Since the formal announcement in March, nothing has really happened,” Ohlig said. “People have just been wasting time on an extremely short time schedule.”
One big concern for companies operating in the U.K. has been their exposures to the British currency, which plunged in the wake of the June 2016 referendum in which U.K. voters decided to leave the EU.
“There’s a lot of uncertainty, and when there’s uncertainty, it eventually impacts the currency, and not only in the way one expects,” said Helen Kane, founder and president of Hedge Trackers, a company that consults on hedge program management. “The whole interaction between the pound and the euro will get more interesting and possibly lead to some other crosses being more volatile.”
Kane suggested that companies should be considering their FX exposures as they put together their budgets for next year. Hedge Trackers has seen an increase in corporate interest in hedge programs, she said, but added, “I’m not sure how much of that is the recent uptick in volatility, the prospect of more [volatility], or the recent [FASB hedge accounting] guidance that is offering fewer barriers to entry in the hedging world.
“For companies whose only exposure is the pound,” she added, “we’ve seen quite a bit more interest and a desire to understand really—not just put on their hedges but understand the risk and when is it appropriate to put those hedges on.”
McMahon also said he’s seeing companies pay more attention to their FX exposures.
“Many were caught unprepared by the Brexit vote, they don't want that to happen again. Treasurers are doing a lot more sensitivity analysis in terms of how much they should hedge and also what instruments they should use,” he said. “They may be hedging a higher portion, and with different, more flexible structures. All treasurers are for sure looking at their exposures more frequently to adjust as needed.”
Brexit also has the potential to disrupt companies’ banking relationships if financial institutions based in London lose the passporting rights that allow them to do business in EU countries.
“If U.S. companies have been relying on U.K. banks in the past for business that’s done on the Continent, I would think that’s something one needs to review,” Ohlig said.
He also sees the cost of banking rising for corporates, as banks that can no longer handle everything from a single hub in London add staff on the Continent. The prospect of higher costs could lead to some retrenching by banks, he said. “Changing banking relationships can be very, very cumbersome, so there needs to be some strategic planning in terms of what bank relationships one wants to have three or four years down the line.”
PwC’s McMahon also cited the portability of products, like derivative contracts, that companies transact with U.K. banks. “Any derivative contract executed between an EU-based entity and their UK-based bank still has a question on what would its EU passport be in the future?” he said.
McMahon said the approach of Brexit also raises questions about London’s role as a market for corporate debt.
“The U.K. has always been a deep market,” he said, noting that multinationals often get a credit rating in the U.K. and issue debt in London. “Will that change going forward, and should they have programs where they can issue debt in mainland Europe as well?
“With Brexit restrictions coming in, that may reduce how many borrowers will be in the U.K. market,” he said. “Treasurers may decide, ‘I’ll also have a funding program in the European market.'”
Keith Bergman, managing director for Zanders U.S., a treasury and finance consulting firm, said companies with treasury operations in the U.K. have concerns about in-house banking and cash pooling as well.
The concerns relate to cross-border tax implications, Bergman said. “With Brexit, if they are completely outside of the EU and these companies want to start lending money and moving money between their U.K. financial center and European entities, they’re going to have to deal with the tax implications for each of the individual countries.”
McMahon noted that London may be seen as having an advantage when it comes to cash pooling, particularly notional pooling, because of differences in implementing certain EU regulations. This may influencetTreasuries to locate their notional pools in the UK. However, companies also need to make payments out of their cash pools, and there’s some question about whether U.K.-based companies will be able to qualify for SEPA payments after Brexit, he said.
Ohlig also cited the possibility that U.K.-based companies could lose access to SEPA, the initiative to simplify cross-border payments in Europe. SEPA “has really been a big help for big companies in making treasury payments and collections much easier,” he said.
But access to SEPA requires “having a regulatory regime in place that’s deemed to be the equivalent of the EU,” he noted. “Since we don’t know what the regulatory regime will be after Brexit, there’s a risk factor in there.”
Companies are also looking at the nationalities of the employees staffing their operations in the U.K. Hedge Trackers’ Kane noted that many people from throughout the Eurozone are employed in the U.K.
“That uncertainty probably needs to be addressed,” she said. “Are all the bankers who are in London going to lose their status, thereby driving all the talent out of the U.K. into other financial centers in Europe? Or are they going to allow business as usual? I think people are trying to figure out what’s going to happen with the people.”