Beyond Brexit
As the UK and EU grapple with the biggest change in post-War economic relations in Europe, we present a selection of our latest news and insights from across our divisions on the Brexit process and its implications.
Published: October 14, 2019
Private Equity Sector
International private equity managers continue to seek U.K. assets, despite Brexit uncertainty, due to their familiarity with the market, a desire to diversify their portfolios, and the need to deploy capital, according to market participants.
Key Takeaways
- The U.K. has traditionally been the hottest European market for private equity deals, but a proportion of capital has been redirected to other European countries.
- The U.K. has a lot in its favor, despite Brexit uncertainty.
- Brexit or no Brexit, private equity firms are sitting on large amounts of dry powder that must be deployed and competition remains high.
Tariffs
Any form of Brexit will both increase supply chain operational costs – by as much as £15 billion (or $19.6 billion) for red tape alone according to HM Revenue and Customs – in dealing with the EU. Dealings with the rest of the world will also continue to face existing tariffs that have been applied by non-EU countries.
For example, the British steel industry is already exposed to three specific tariffs relating to steel as well as the section 232 tariffs on the steel and aluminum industry, Panjiva’s analysis of government filings show.
Key Takeaways
- No noticeable impact from U.S. tariffs on British exports.
- Whiskey is the biggest target for new U.S. tariffs.
- After whiskey and aerospace the next largest category covered by the tariff was self-propelled construction diggers.
Financial Fragmentation
Brexit is set to splinter Europe's financial markets, posing long-term problems for London and weakening other EU financial centers, market observers say.
The British capital could struggle to attract top talent, while a fragmentation of businesses throughout the continent could pose financial stability problems for centers such as Dublin.
Key Takeaways
- Amid the threat of a no-deal Brexit, cities like Frankfurt, Paris and Dublin have benefited from financial firms moving staff out of the British capital, but the relocation of business fractures a market that works best when it is integrated.
- London will remain the undisputed leader among European financial centers regardless of the Brexit outcome, market observers agree.
- Staffing is a key issue. Companies looking for a place to locate subsidiaries will consider access to staff before all other factors.
Rating Actions
The persistent threat of a no-deal Brexit is a dark cloud hanging over U.K. corporates, and would likely lead to a spate of negative ratings actions, according to S&P Global Ratings.
In a Sept. 30 report, the rating agency warned that if the U.K. leaves the European Union without a deal — the risk of which S&P consider to be "limited" — the U.K. economy could be pushed into a recession, with GDP falling by 2.8% in 2020. The most exposed sectors would be automotive, leisure, retail, real estate, aerospace and defense, and transport infrastructure. S&P has taken 39 ratings actions since raising its risk assessment of a no-deal Brexit to "high" in October 2018.
Key Takeaways
- S&P Ratings said the initial impact would likely be limited to outlook changes, although certain nonfinancial corporates could be downgraded.
- Automotive players are among those expected to suffer the most in this regard, with important supply chains set to be disrupted by longer checks at customs while tariffs will erode profitability.
- More than half of S&P's 45 public ratings on social housing, universities, and local governments have negative outlooks, with 18 of them downgraded or placed on negative watch in the last 12 months as a result of Brexit uncertainty.
Further Reading
