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Risk Management

Address Hedge Programs Ahead of Brexit

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February 13, 2017

US Bank: Brexit considerations on hedging (that could apply elsewhere).

Brexit 209If ever there was a time to consider initiating or rethinking a corporate hedging program, now might be it for companies with operations in Great Britain or otherwise exposure to pound sterling (GBP).

British citizens’ vote last summer to exit the European Union (EU) initiated an at least a two-year process that likely will see intermittent volatility in the GBP rivaling its plummet against the US dollar shortly after the vote. In a recent note to treasury executives of corporate clients, US Bank discusses the need to hedge that risk as well as other steps corporate treasuries should consider as the UK’s departure unfolds. Those issues are also worth considering as citizens of France, the Netherlands, and other EU member countries participate in elections this year that could result in their own countries leaving the union.

US companies trading with UK firms or with operations in the country, which many use as a jumping point into the larger European market, will have a somewhat easier time deciding on longer-term issues once the UK outlines a defined exit strategy and begins negotiations. Prime Minister Theresa May has suggested she will unveil a strategy by the end of March.

In the meantime, US Bank notes, the one clear short-term course of action for companies to take is to evaluate their exposure to GBP and act to manage related risks posed by increased volatility. That’s particularly important for companies that have a big mismatch between US dollar (USD) and GBP in their payables and receivables.

“If you have a US Dollar functional entity selling into the UK and getting paid in pounds — and the company has no natural offset to that — currency volatility could have a huge impact on [the] US business,” noted Mary Henehan, senior vice president and co-head of Commercial FX Sales at US Bank.

The bank suggests that companies should at least go through the process of determining whether they should or shouldn’t initiate a new hedging program or revamp an existing one.

Another important issue for many multinational corporations (MNCs) to monitor includes the extent to which using the UK as a foothold to access the rest of Europe will be permissible under their unfolding relationship, since it could dramatically change companies’ long-term strategies. Along similar lines, U.S. MNCs may need to relocate their UK-based European treasury centers, as well as review their cash pooling and other cash management structures, since new cross-border taxes may emerge.

Indeed, U.S. Bank says, London’s days as the financial center of Europe may be coming to an end, and banks have already started to move some of their operations out of the UK, to destinations such as Frankfurt. Corporate treasuries may want to consider that possibility when deciding where to place treasury resources as well as the language and other skills of new hires.

Craig Weeks, SVP and manager of US Bank’s international banking group, notes that for US companies a devalued GBP means cheaper imports from the UK as well as more attractive investments there, but it also raises the cost of financing a UK-based entity. In the end, according to Weeks, the UK is only the US’s seventh largest trading partner, so the impact on US corporates will be moderate; on the other hand, it’s the US’s top partner when it comes to importing and exporting financial services, potentially making Brexit a bigger problem for financial services firms.

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