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Preparing for a No Deal Brexit - Finance

Peter Legge Peter Legge

In the event of a No Deal Brexit, we may expect to see increased volatility in financial markets with the Bank of England stress test modelling shows a significant fall in the sterling index in a no-deal scenario, albeit this is likely to strengthen if a deal is reached.

Debt finance may become more expensive.  Lenders are already tightening credit and will revise credit risk.  Interest rates may rise or fall depending on the perceived impact. 

In the event of no deal, UK organisations will not have access to EU funding such as the European Regional Development Fund and Horizon 2020 or the Common Agricultural Policy (CAP). The UK government has given a guarantee to continue funding up to December 2020 any EU projects agreed before Brexit day.

Financial reporting obligations will also be impacted. The risks Brexit presents to a company must be clearly communicated in annual reports, keeping in mind that these disclosures should be ‘fair, balanced and understandable’. This is particularly important for valuations, modelling and scenario planning. These disclosures will be high on the Financial Reporting Council’s (FRC) watch list for the forthcoming reporting season and investors and other stakeholders will expect to see an assessment of the impact of Brexit and a clear plan for mitigation.

So what can businesses do now?

Companies should monitor future cash flows and ensure they have enough liquidity on their balance sheet by reviewing and optimising working capital performance, exploring alternative sources of finance and reviewing foreign currency exposure and hedging positions.

Business should review their existing lending covenants under various Brexit sensitivities. If there could be an issue then early communication with your funder is advised.

If they use European funding programmes, check the detailed government guidance for their particular programme and take action accordingly.

Explore potential deal prospects. The depreciation of the pound will make UK assets more attractive to overseas investors. The uncertainty will also provide opportunities for those willing to take a risk on Brexit. This means there will be opportunities for those wishing to enter or exit markets.