The Brexit topic continues to draw in the crowds at any seminar and this morning (31 January 2017) was no exception. It was ‘standing room only’ at Slaughter and May’s client seminar titled: Tremors and Aftershocks: How to manage the impact of the Brexit earthquake and recent world events.
How to manage the impact of the Brexit earthquake? It was clear that we’re not yet sure exactly when the earthquake will happen, the magnitude, or even where the epicentre will be. From a poll of attendees 37% thought it was too early to understand how Brexit was going to impact their organisation over the next 12 months, dropping slightly to 31% when asked the same question over the longer term. Many corporates are in ‘wait and see’ mode. That’s not to say they are sitting on their hands doing nothing. Some companies have set up Brexit sub-committees and are undertaking scenario planning. The latter is proving challenging with so many unknown factors and the various permutations and combinations in each scenario.
Here’s a checklist of some of the potential aftershocks and what corporate treasurers need to think about:
- With the loss of passporting some banks may need to restructure which may entail some of their loan and derivative contracts being transferred to other banks. Post Brexit you may have very different financial counterparties to what you have now. Consider a counterparty credit rating floor in your documentation if you haven’t already done so.
- Brexit specific provisions are now being incorporated into customer and supplier contracts. Don’t rely on general contract provisions, such as force majeure.
- Think about the “Brexit trigger” in the contract wording and how it describes Brexit. For example, Is it two months from when Article 50 is enacted, or when a free trade agreement is reached?
- Whilst there haven’t been any specific drafting changes by the LMA to loan contracts to-date, with the loss of passporting lenders will focus on the transfer provisions should it be necessary to do so.
- Some debt prospectuses are disclosing the potential impact of loss of the single market
- Take a close look at the ability to comply with financial covenants, including where applicable, the potential impact of increased FX volatility on headroom.
- Consider the ability to take mitigating actions, such as disposing of an asset. M&A activity has declined with so much uncertainty in the market.
We’ll continue to update corporate treasurers on relevant Brexit issues on our “Brexit Useful Resources website page”.