The Brexit vote will force treasury and finance departments to hold a difficult but critical conversation with senior management and the board. At issue: nothing less than how to structure and operate corporate treasury and finance in post-Brexit England and the EU.
“If you have not thought through the impacts of a Brexit before and got a plan in place, it’s certainly something you need to do now,” said Hugh Davies, a director at Zanders Treasury and Finance Solutions in London.
Currently, it seems that the UK won’t formally ask to leave the EU until voters elect a new Prime Minister later this year. When they do, the Prime Minister will invoke Article 50 of the Treaty of Lisbon and begin the long process of re-configuring England’s relationship with Europe.
You need to think about your UK and EU bank relationships
UK banks’ stock prices took a beating in the wake of the Brexit vote, but the Bank of England has said it is well prepared to deal with any issues, Davies noted. “But counterparty risk still should be of some concern,” he said.
You need to think about your UK and EU staffing
One advantage of EU membership for the UK is its so-called “passporting” rules that allowed cross-border financial service transactions to seamlessly transfer from one member-nation to another. “This is why some banks are considering moving a large number of their workers from the UK to other financial centers in Europe,” said Davies. He named JPMorgan and HSBC in particular.
Resourcing will be another consideration. With the UK leaving eventually, it may be more difficult to rotate staff and expertise back and forth. “If you’re a U.S. multinational with a treasury center in The Netherlands with UK staff, it may not be possible or practical for such an arrangement to remain in place after Brexit,” said Davis.
You need to think about relocating your corporate treasury center or changing banking partners
“If, as a European entity or regional treasury center in Europe, your pan-European cash management services are provided by a UK bank, you may need to look at sourcing an alternative banking partner in another EU member country if the passporting rules no longer apply. Equally, it may mean you have to relocate your corporate treasury center from the UK to another EU member country to be able to retain a bank providing those services from France or Germany,” said Davies. “You’ll need to give scrutiny to where your banks are located for the services that they are providing.”
You’ll need to think about nations leaving the EU
“That concerns me even more,” said Davies, naming The Netherlands and France as two candidates. “That would put much more responsibility on Germany.”
Some good news: The Fed won’t hike interest rates anytime soon
“The markets don't expect a U.S. rate hike through February 2017,” said Amol Dhargalkar, Managing Director, Global Corporates Sector, Chatham Financial.
If you haven’t done so already, you really need to create a hedging program
This is the biggest foreign currency impact since the RMB unpegged from the U.S. dollar 15 months ago, Dhargalkar said. The enormous volatility demands that you should create a hedging program. “Mid-market U.S. corporates with around $1 billion in annual sales still haven’t focused on this,” he said. “You need a hedging program—or you need to get everyone comfortable with being unhedged.”
Added Craig Martin, executive director, Corporate Treasurers Council: “This is where options come into play.”
Don’t forget your debt covenants
When you’re negotiating a credit agreement, how you define debt covenants is more crucial than ever, Dhargalkar said. “For example, if you have EBITDA in the UK and it's translated into U.S. dollars that could have a major impact on your debt covenants,” he said
Finally, think about the business opportunities
Martin noted that with many EU companies taking a major hit in their stock price, it could represent a buying opportunity for opportunistic firms. “This could represent a for-sale sign in Europe if you’re looking to deploy capital,” Dhargalkar said.