Budgeting for Brexit

Most Irish firms with strong ties to the UK appear to be adopting a ‘wait-and-see’ approach to the outcome of next month’s British referendum on EU membership, but the uncertainty a ‘leave’ vote could generate means that such firms – particularly SMEs – should have some kind of contingency strategy in mind, corporate finance experts say.

In a recent briefing note, law firm McCann Fitzgerald said the implications of a vote to leave the EU would be huge given any negotiations that would follow such a vote would be long, complex and protracted:

“Most significantly, alternative legal or political treaties and arrangements will not be put to the voting public in the referendum itself nor even known at the time of the referendum. Thus, a vote to leave would immediately lead to political, economic, legal and regulatory uncertainty.”

Shaun Murphy, managing partner of KPMG, says each business would face unique challenges but agrees “uncertainty is probably the biggest overall factor”.

“One of the biggest issues relates to how a separation of the UK from the EU would work,” he says. Under article 50 of the EU (Lisbon) Treaty, the UK would have two years to negotiate a complete “withdrawal agreement” outlining all details of the separation and the timetable.

“The eventual outcome – the UK’s future legal and trading relationships with Ireland and the rest of the EU – would hinge on these negotiations and if they were to drag on, which they inevitably would, that would be very unhelpful,” says Murphy.

The uncertainty would obviously centre on the form of any new relationship but also how long it would take to settle that form.

Indeed, the McCannFitzgerald briefing notes that if no agreement is made within the two-year period, both parties could “walk away” and create even more uncertainty, although the negotiation period could feasibly be extended by mutual agreement.

Given that € 1.1 billion worth of trade takes place between Ireland and the UK each week and which directly employs 400,000 people in both jurisdictions (split evenly), there is clearly a lot at stake.

The potential hazard is even greater for SMEs, says Con Quigley, corporate finance partner at BDO. “Customs regulations are the obvious starting point for change – but the devil will be in the detail,” he says.

“Corporate finance transactions are always impacted by confidence. Funding and M&A activity among UK-exposed and sterling-exposed businesses will be hit if Brexit happens. And not only will many SMEs be hit directly, there is a potential longer-term impact on valuations and liquidity of SMEs due to not being in a common market with our nearest, most important and most amenable market. Our smallness will be more exposed.”

So where should firms start when it comes to considering a contingency plan in the event of a UK vote to leave?

‘Four freedoms’

“It depends on their circumstances. EU membership guarantees four freedoms – namely free movement of goods, services, people and capital,” says Murphy. “Irish companies will base their strategy largely on the extent to which their UK operations benefit from these four freedoms and the extent to which these freedoms could be affected by post-Brexit negotiations.

“Most companies I speak to are adopting a ‘wait-and-see’ approach given there will be sufficient time to plan during any leave negotiation period.”

While the impact will vary greatly from firm to firm, exporters of consumer goods and business materials would have the most to fear from any restrictions on free trade, says Quigley.

Many commentators have cited the likely impact of a Brexit on the value of sterling vs the euro, with some believing it could take up to 10 years before the position could be truly settled.

Quigley certainly advises firms to focus – at the very least – on any exposure to currency volatility, whether it’s linked to any trading, funding or investments within the UK.

“Currency impact is harder to predict – and is always two-sided in any event.” The impact, he adds, will depend on the immediate reaction of the markets and how this affects sterling, but also if the euro-sterling rate proves to be volatile over the longer term. If it is, then it will impact not just on exporters but on importers and the flow of capital.

“London is such an important hub for the movement of capital for Ireland that this is a concern. I’m particularly thinking of bank debt. The nature of bank lending is already greatly changed, and not solely because of the recession. Technology, consolidation and the impact of scale in the management of commercial lending are impacting on debt for Irish SMEs too. More ongoing sterling volatility will not help our capital environment.”

“Ultimately though, I expect Irish businesses to adjust because that’s what businesses do,” says Quigley. “And Ireland’s role as a beachhead in Europe for other economies should increase.”

Indeed, while the strategy for managing a post-Brexit business scenario for firms with exposure to the UK is about dealing with the risks and challenges, a ‘leave’ vote may present some sectors here with an advantage. “I see opportunities for the financial services industry for sure,” says Quigley.

The Central Bank has said it expects a spike in applications from financial firms in the UK to gain authorization in Ireland, while reports suggest some firms with operations here already are looking to boost their presence.

Asset managers fear they would no longer be allowed to sell funds that are regulated in the UK into Europe in the event of a Brexit, forcing them to move the products to hubs such as Luxembourg and Dublin. There are also concerns that UK-based investment staff would no longer be allowed to run funds that are registered and overseen elsewhere in Europe.