With Brexit continuing to wreak havoc on the markets, AFP spoke with three treasury and finance executives to see how they are handling the fallout. They are concerned about how Brexit will impact:
- Bank relationships
- Budgeting and forecasting
- Cash pooling and notional pooling—particularly with respect to Reg 385
Marsh & McLennan Companies
For Marsh & McLennan Companies, the impact is twofold. The professional services firm has a large presence in the U.K.; it is actually its second biggest market outside of the United States. Futhermore, one of Marsh & McLennan’s core businesses is risk and insurance brokering services whereby London serves as one of the world’s largest hubs.
“Brexit is going to impact London as a financial and an insurance hub for years to come,” said Ferdinand Jahnel, CTP, vice president, treasurer for Marsh & McLennan and a member of AFP’s Board of Directors. “So that’s something I’m thinking about right now.”
While the longer-term consequences of Brexit are still unclear, as Marsh & McLennan goes into its next budget cycle and plans its business out for 2017 and beyond, corporate leadership will have to factor in likely negative changes to the British economy. Jahnel doesn’t foresee a scenario where his company dramatically reduces its presence in the U.K., but he does acknowledge the possibility that “some of the resources we use on the insurance side could wander off to other parts of Europe.”
He also sees the same thing likely happening with banks; while most financial institutions will continue to have a presence in the U.K., many could decide to move people elsewhere. “Even U.K.-based banks like Barclays will think twice going forward; they’ll go where the growth is coming from,” Jahnel said.
Brexit also has implications for cash pooling structures—a topic already on treasurers’ minds with the U.S. Treasury Department’s proposed update to section 385 of the IRS tax code. “We have an efficient, global, multicurrency cash pool in place, and we will have to look at the structure of it,” Jahnel said. “I strongly hope that cash pooling continues to survive in some way, shape or form, because it’s the most efficient way for multinationals to manage money globally.”
Jahnel is particularly concerned about notional pooling, with the value of foreign currencies plummeting against the dollar. “That has a negative impact on available liquidity in the pool as the value of the pound deposits are worth less today than they were worth last Thursday,” he said. “That doesn’t have an accounting impact but from a translational value perspective, it negatively impacts us. We have a weaker dollar right now, but in times of crisis, the dollar always strengthens.”
AFP Chairman Anthony Scaglione, CTP, executive vice president and CFO of ABM Industries Inc., does not see Brexit having a major impact on ABM, as his organization has a relatively small presence in the U.K. His concerns are primarily in the near-term, due to all of the volatility in the markets. “Short-term, the FX volatility on our results in the U.K. as they translate back to the U.S. is something that we’re watching,” he said. “But we’re somewhat insulated from the impact, given that our business is smaller in the U.K. So I think we’ll withstand that externally pretty well.”
As for any longer-term impact, ABM provides facility management services at Heathrow Airport—a major hub for people traveling to and from Europe. Could Brexit ultimately lead to business travelers bypassing Heathrow altogether? “The impact there is a little harder to quantify,” Scaglione said. “There might be an immediate-term boost in retail travel, with the pound being cheaper. But longer-term, it’s hard to say whether business travel will be impacted by Brexit.”
Like Jahnel, Scaglione noted that the biggest impact Brexit could have on many companies is in budgeting and forecasting. Therefore, it’s likely to be a bigger headache for financial planning and analysis (FP&A) departments than treasury functions.
“It is going to be a challenge for FP&A,” he said. “We’ve been talking internally about how we’re going to plan for next year—how we’re going to update our long-term forecast, how the exchange rate and uncertainty plays into our acquisition strategy or whether we take wait and see, etc. I can only imagine, if you have large operations in the U.K. and Europe, what questions you may have about the long-term impacts to your business and how to model that from a planning standpoint.”
For Jordan Krugman, CTP, treasurer for Invesco Ltd. and also an AFP Board member, Brexit is certainly an important issue; fully 25 percent of the asset management company’s revenues are derived from clients in the U.K. “Despite the fact that we have separate operating entities, fund ranges, sales forces and have hedges in place to protect 75 percent of our pretax profit, stocks of financial services firms that operate in the U.K. and Europe, or have exposure to the region, have been hit especially hard post-referendum,” he said.
Fortunately, Invesco did its due diligence and was as prepared for the impact as it could be. “From a volatility perspective, we have remained diligent on expense management since the end of 2015, so the event itself is not triggering any incremental expense controls—but rather reaffirming the procedures and programs that were put in place over six months ago,” Krugman noted.
As for Invesco's corporate clients, Krugman noted that the majority of them are reacting “coolly,” reevaluating their asset allocations in light of the vote, but not making decisions erratically. Looking ahead, he is unsure of the long-term impacts, but suspects that if a second referendum does happen and the majority of Brits vote to remain, the volatility and confusion in the markets would likely also remain.