Will Brexit Lead to Higher Funding Costs? Companies Aren't Sure

By Nina Trentmann

Chief financial officers will have to wait and see if the U.K.'s exit from the European Union leads to higher funding costs and other charges, as many British and European companies loaded up on liquidity before the Dec. 31 deadline for a trade agreement, potentially masking any immediate effects of the split.

Over $1.6 trillion in assets, large numbers of financial contracts and thousands of bankers and other professionals had to move to the Continent in the run-up to Brexit after it became clear that London -- Europe's dominant financial center -- would lose its passporting rights.

Those rights had allowed U.K.-based banks to offer a range of services to EU clients, creating deep pools of liquidity in London that companies could tap. Now, with more capital and transactions being handled outside of the U.K., London may lose some advantages of scale, said Alexander Engel, CFO of Standard Chartered PLC's EU business. "There will be more inefficiencies," Mr. Engel said.

Companies raised $599.07 billion through bond sales in the European Union and the U.K. in 2020, up 14.2% from 2019, according to data provider Dealogic. Corporate syndicated loans issued in the EU and Britain increased to $797.80 billion in 2020, up 2% from 2019, Dealogic said.

This year, bond issuances in the U.K. and the EU through Jan. 20 exceeded the volumes of the prior-year period, Dealogic said.

But it is difficult to differentiate between Covid-19, Brexit and regular market activity when trying to pinpoint the cause of the rise, said Julian Wentzel, head of HSBC Holdings PLC's investment bank for the U.K. and parts of Europe. "That creates complexity for us all," Mr. Wentzel said.

Bankers say that financing costs haven't changed much since the start of the year, and expect it will take time for any increase to show. This is due partly to the pandemic and the monetary support that the European Central Bank and the Bank of England are providing markets, including through their bond buying and other stimulus programs. Those measures reduce funding costs for companies on both sides of the English Channel, especially those with strong credit ratings.

The 11th-hour trade agreement between the U.K. and the EU last month covers areas such as trade and tariffs, but doesn't say much about financial services. Overnight, rules relating to customs declarations, import duties and value-added tax changed, forcing nonfinancial companies to quickly toss their plans for a no-deal scenario, which for months appeared to be a likely outcome of the talks. What happens next with financial services will depend on whether the EU deems British regulation to be equivalent or not, potentially later this year.

CFOs in recent months have taken a hard look at their companies' loan books, bonds, swaps and other financial instruments to see which of these had to be shifted and how Brexit would affect their finance and tax functions.

Trading of large volumes of European stocks earlier this month shifted from London to venues in Amsterdam, Frankfurt and other EU cities. European companies also moved derivatives such as swaps and hedges to EU-based banks.

German software giant SAP SE last year replaced its U.K.-based banking counterparties with legal entities of the same banking group based in the EU, said Steffen Diel, the company's global head of treasury, adding that the transition went smoothly. And German rail operator, Deutsche Bahn AG, moved cross-currency and commodity swaps from its U.K.-based banks to the EU, a spokeswoman said.

Many companies, however, have left their cash-pooling structures unchanged, meaning that a significant portion still operate out of London, bankers say. Cash pooling allows companies to combine their credit and debit positions into one account.

"We have only seen a limited number of U.S. clients move their structures to Amsterdam," said Richard King, head of corporate banking in Europe, Middle East and Africa at Bank of America Corp. Most U.S.- and EMEA-based companies have left their cash pools in the U.K., Mr. King said, citing tax advantages, legal infrastructure and the time differences between Britain and the continent.

CFOs must keep track of developments in various fronts, such as arrangements governing taxation of U.K. subsidiaries. Those are no longer covered by EU directives allowing tax-free repatriation of dividend, license and other payments, which means that companies must resort to contracts between the U.K. and the bloc's member states on double taxation. Not all of these contracts, however, reduce the tax load to zero, potentially having an impact on tax reporting and group structures, said Stuart Lisle, co-chair of the Brexit task force at professional services firm BDO LLP.

Finance executives also need to be aware of additional data requirements for payments from the U.K. to the EU, and vice versa. Even though the U.K. remains part of SEPA, a set of tools and standards aimed at making cross-border electronic payments between countries as inexpensive and easy as those within one country, transfers to and from Britain are now treated as coming from jurisdictions outside the EU.

"The lack of a financial services agreement is causing a higher workload, " said Jean-Marc Servat, chairman of the European Association of Corporate Treasurers. "In practice, this means that payment messages need to include more information than they did before."

Write to Nina Trentmann at [e-mail]

(END) Dow Jones Newswires

01-25-21 0544ET