That Ol’ Share-of-Wallet Issue

NeuGroup’s Assistant Treasurers’ Leadership Group tackles managing banks and the corporate wallet.

stock market ticker62

Libor to SOFR Switch Will Be Challenging

Response to CME’s SOFR futures contracts may provide early signal.

iTreasurer logo 2016

Subscribe Now

Today is over. Subscribe to iTreasurer and
get ahead of the problems you will face tomorrow.

Global Treasury

Brexit Sinks In, Markets Sink

Share |
June 24, 2016

But for now, treasurers will have to watch and wait like everyone else and certainly plan for the next event.

Euro BreakupNow what? With the UK’s historic vote to leave the European Union there’s not an industry, sector, company, function, city, town, neighborhood, or house that hasn’t been affected. But how they are affected is yet to be known; and may not be known for some time. That’s because it could be years before the split actually takes place.

Certainly the immediate response was to sell, sell, sell, and most markets did that. The uncertainty has hit all-time highs, with many wondering not only what will happen next, but also who might consider leaving the EU down the road. Sweden, Denmark, Spain and even Italy and France, it has been said, might consider exiting.

For multinational corporations that, aside from the hit to their stocks, are likely wondering what the impact will be in terms of regulations and other international deals. “One of the first questions [for companies] is what impact is there right here and now, and I think the answer to that there will be none,” said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial. “That is, except from a risk-management perspective.”

And for corporate treasurers that perspective is fairly simple: if you had unhedged exposures to UK sterling or the euro or any other UK-related investment, you’re probably hurting today. But if your company made the wise but probably costly decision to hedge, you’re likely fairly satisfied but certainly not triumphant.

“There was a fair bit of gnashing of teeth [ahead of the vote] for many reasons,” said Mr. Zubrod, describing companies’ “damned if you do, damned if you don’t” predicament. Before the vote, “you sort of entered this space in which volatility was very high in anticipation of the vote, and buying options to protect the downside was very expensive,” he said. And if the vote was to remain in the EU, and companies that had, say, locked in a forward contract to protect the downside, there would have likely been a jump in currencies – and disappointment. “Then they would have a contract that would be underwater—quite possibly substantially underwater,” said Mr. Zubrod.

But many companies, as a matter of course, were ready. “Our policy is always [to] hedge our open positions,” said one treasurer. “So we’re happy with what we’ve done.”

According to Jacqui Drew, solution consultant at risk management systems provider Reval, many companies her firm had spoken to ahead of the vote had been prepping (in way, for many years now), whether through taking positions to mitigate risk or at least being ready. “Many have taken the position of ‘let’s be ready to act if something does happen,’” she said. And for those companies who did nothing, “there’s probably a lot of ‘what can we do now?’ Unfortunately it might be too late.” If they hedge now “it’s going to be really expensive.”

Overall, Ms. Drew thinks that companies have been mostly prepared, given the “Black Swan” events that have taken place over the past several years. If that’s the case, they have the systems in place to handle a Brexit, at least in the immediate term. However, she added, if companies don’t have global visibility to their exposures or really don’t understand them and the risks they face; and if they don’t perform any scenario analysis, “they’re just going to get hit again.” But hopefully, she said, companies are becoming more aware of the risks and are looking to have more systems in place to deal with situation like this.

What Happens Now?
While just about every commentator is stymied by the “What happens next?” question, most do agree that there will be a long period of “living together after the divorce.”

According to international law firm Baker & McKenzie, the vote to leave the EU means that, “at some point in the near future, the UK Government will trigger Article 50 of the Treaty on the European Union by notifying the European Council of the UK’s intention to leave.” This notification starts the clock on a two-year countdown in which the UK and the EU will negotiate the withdrawal. The bad news for the UK is that the withdrawal likely won’t be on its terms. The EU holds the power. “The form of such a withdrawal agreement will depend on negotiations and there is no guarantee that the UK will be able to withdraw entirely on its own terms,” Baker & McKenzie wrote in a blog. The good news is that for that two-year period, the laws remain EU laws and nothing changes legally.

That means many transactions, for instance, supply chain finance, that companies are in the middle of, won’t be affected just yet. “The supply chain finance business may not be seriously impacted by Brexit, as it is a rather unregulated business,” said Enrico Camerinelli, senior analyst at Aite Group. “The UK’s exit will certainly (at least in the short term) hit the pound, with inevitable consequences on current SCF deals. However, the exit process will take at least two years, so the market will find its countermeasures.”

As for regulation, Chatham’s Mr. Zubrod said the UK will likely continue following the dictates of the G-20 and the EU. London is the financial services hub of Europe, Mr. Zubrod pointed out. “They’re the king of financial services in Europe,” he said. “And if it's going to maintain that position, it will have to have regulatory regime that meets the European standard.” And indeed, the global standard, he added.

Now that the deed is done, it will be up to treasurers to do a post-mortem to help them navigate the certain volatility going forward. Questions that need to be asked should include:
  • What pre-event hedges paid off and those that didn’t?
  • How should the company handle its bank relationships and deal with its counterparty concerns?
  • What liquidity structure changes should the company be considering, including the location of the header accounts and treasury center managing entities?
  • What about BEPS, the OECD’s program to stop what it sees as corporate tax avoidance?
  • The BEPS-led substance requirements have been favoring UK branches and other entities; does Brexit change this?
  • And finally, what are the longer-term scenarios for the UK and sterling, and the EU and euro, that have been made more real by this event?

comments powered by Disqus