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Brexit: Treasury implications for corporates

We explore the impact of Brexit on corporate treasury and discuss the practical next steps to take ahead of October's deadline.

How Brexit may affect my business remains a question on many a treasurer’s mind. With wide ranging implications on trade, FX, as well as payments, preparing for and taking some initial practical first steps can ensure you are best placed for an outcome that for many is still unclear.

  • Payments

    On 7 March 2019 the European Payments Council approved the application from UK Finance (made on behalf of the UK financial services and payment industry) for the continued participation of UK PSPs in the SEPA Schemes in the event of a no deal Brexit. This means that should the UK exit the EU on 31 October without a transition period, the UK would continue to participate in the SEPA clearing scheme.

    Assuming that the UK continues to participate in SEPA after 31 October 2019, payment charges should remain on a SHA basis, in line with the SEPA Credit Transfer Rulebook, although some banks may choose to charge additional fees.

    Clients making large volumes of SEPA transactions may opt to de-risk the situation and open accounts with Barclays in Europe. Contact your relationship team to discuss further.

  • Trade

    Sector-specific challenges

    The way in which a corporate is impacted by Brexit will depend on whether it is primarily a manufacturing, services or trading business.

    Manufacturing businesses. 

    Although UK manufacturers are currently benefitting from the weak pound, they could find that their competiveness is reduced if the cost of importing raw materials from the EU increases as a result of Brexit. They could also face supply chain pressures, such as suppliers requiring faster payments or delays in receiving supplies in time for manufacturing activities to take place. In addition, customers may start to demand extended payment terms. All these challenges will affect working capital and the amount of financing that a business needs to support its working capital.

    Services businesses. 

    Some service sectors are likely to be more impacted by Brexit than others. For example, while the EU and the UK plan to ensure passenger and cargo air connectivity through a Comprehensive Air Transport Agreement, it is not clear how Brexit will impact on the telecoms interconnectivity regime. Business services are likely to be affected in some way, but we do not yet know how.

    Brexit is already having a clear impact on the financial services and banking sector, however, with institutions having anticipated the loss of their rights to passport their services throughout Europe in the event of a no-deal Brexit. They have either set up new subsidiaries in continental Europe or made additional investment into existing subsidiaries. Going forwards, Barclays will serve clients in the European Economic Area through Barclays Bank Ireland, its fully owned subsidiary.

    Trading businesses.

    Traders could experience a rise in the cost of goods imported from the EU following Brexit. As a result, they need to consider how they could pass those costs onto their clients while fending off competitor threats from other markets. They may also need to renegotiate long term supplier agreements – for example, if they have the exclusive rights to supply a particular EU product within the UK. Brexit-related changes could result in compressed margins for traders, so they should allow for these when doing cash flow forecasts and preparing for the future.

    Due to the potential repercussions of Brexit, some businesses are choosing to postpone their capex and investment plans. It is important that businesses look to seize trade opportunities while managing their risks, however. For that reason, they should be exploring the use of automated supply arrangements and the potential to enter new markets.

  • FX

    Considerations for Corporate Treasurers

    The following considerations could help you to manage your FX volatility, potentially by using new approaches: 

    • Consider hedging sterling-related exposure to manage FX risk. Potential solutions include spot FX, forwards and swaps. For example, Barclays helped the University of Sussex to hedge the FX risk associated with euro-denominated grant payments, and the case study is available on our website.

    • Consider using natural hedges where cash flow allows. It may not be necessary to convert all foreign currency receipts into sterling if there are likely to be expenses in those currencies in the future. FX swaps can sometimes be used to move funds between currencies while managing currency risk.

    • Consider reviewing your supply chain for ways to minimise FX risk. Options include asking suppliers to take payment in the currency of your sales, or switching to sterling-denominated suppliers.

    • When hedging, ensure that your FX hedges are matched to your cash flow and invoices. If necessary, you can effectively adjust the value dates using an FX swap.

    • Review your budget FX rates frequently. Assess them on the basis of timely market information and upto- date rates. You can view Barclays’ currency forecasts by consulting your FX dealers.

    • Make use of Barclays’ FX tools and services, such as BARX Corporate, which streams real-time tradable FX rates straight to your computer. We can also provide call orders (where we notify you if we hit a particular rate in the market) and market orders (where we will trade on your behalf if the market moves at a particular rate).
  • Financing

    While the full economic repercussions of Brexit remain unknown, companies cannot easily anticipate what effect – if any – the event will have on their funding requirements. Encouragingly, however, Brexit-related uncertainty has not yet impacted on UK companies’ ability to secure funding from lenders based either locally or overseas. In fact, despite all the political turmoil of the last three months of 2018, the overall availability of credit to the corporate sector in that quarter remained unchanged, according to the Bank of England’s Credit Conditions Survey – 2018 Q4.

    Refinancing

    While banks’ ability to lend is unlikely to be constrained post Brexit, many companies have still chosen to refinance or extend their loan facilities early. Some have also switched from uncommitted finance facilities, such as overdrafts, to committed facilities, such as revolving credit facilities. Others have sought greater headroom in their borrowing facilities or more flexible covenants as a safeguard against a potential deterioration in economic conditions

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