A year after the UK voted to leave the European Union, what are the implications of Brexit for corporate treasurers, and what steps should they be taking to overcome the various challenges?
On Wednesday 29th March, nine months after last year’s referendum vote, Prime Minister Theresa May sent a letter to Brussels triggering Article 50 and setting in motion the UK’s departure from the EU. Nevertheless, considerable uncertainty remains about the exact form that Brexit will take, and what this will mean for corporations. Points which will need to be determined include the status of EU nationals in the UK, the transition of EU regulations and whether banks retain their passporting rights.
For corporate treasurers, the possible impacts of Brexit include both short-term and long-term challenges. The fall in sterling since the referendum last June has been particularly notable. “While that hit last June, the effects are now becoming apparent,” comments David Stebbings, Director, Head of Treasury Advisory at PwC. “Many companies that import into the UK had hedged for a certain period. We’re now seeing that hedging come to an end, and the effects of the fall in sterling are hitting company results or forcing them to raise prices.”
While there are actions that companies can take to address the fall in sterling, Stebbings points out that the longer-term picture is less clear. He notes, “One of the key issues is what the banks are going to do – how are they going to operate in three or four years’ time?”
Despite these uncertainties, Nick Burge, Head of Structural and Regulatory Solutions, Global Corporates at Lloyds Bank Commercial Banking, says he is not seeing treasurers changing strategy or adopting any knee-jerk reactions. He adds, “The overriding view from companies is that they will be able to continue to source financing and financial services as they do today, backed up by banks and policymakers to ensure market continuity.”
What to consider
While the impact of Brexit will vary depending on individual companies’ business models, industries and geographical footprints, there are a number of questions that many treasurers should be asking. Rick Martin, Group Treasurer of GasLog, says the company is looking at a number of different factors where Brexit is concerned.
“Being a global shipping company, we are looking at what it might mean for world trade, and are articulating how the global gas trade is just that – not at all tied to the perturbations within a particular geography,” says Martin. Other considerations include understanding the possible implications for the company’s financing arrangements and “making sure that we are ahead of the curve, should it have unhelpful impacts on our lenders and/or where we are depositing excess cash.”
But while it is clear that Brexit will present considerable challenges for corporate treasurers over the next couple of years, it is also worth considering the opportunities that may arise. “Brexit may give a greater focus on the financial risks that the business is facing,” explains Stebbings. “So it makes you look at forecasting and systems, and may raise the business case for treasury to have more resources.”
Carl Sharman, a Director in Deloitte’s Treasury Advisory practice, notes that how banks prepare for, and react to, potential changes in the regulatory framework may also change how they transact with their corporate clients. He points out that this could result in some activities being routed through a different entity in the banking group, for example.
“Talk to relationship banks, lenders, analysts and debt investors, and understand what they are thinking and what their worries are, and if your business is seen externally by them as a risk,” he advises. “In other words, is it especially exposed to European markets, import or export, workforce impacts, etc.? Effective PR is also paramount and good internal management can strengthen market perceptions.”
Many questions remain unanswered at this stage – but while this makes it difficult for corporate treasurers to assess the longer-term impact of Brexit on their businesses, there are plenty of steps that treasurers can and should be taking now to understand the different possible exit scenarios and the potential implications of these for key banks and suppliers.