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 Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
January 25, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.