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Don’t forget about Brexit

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By Sam Kerr
07 Jul 2020

Equity capital markets are gearing up for a busy autumn and UK companies have been at the forefront of activity in Europe since the coronavirus pandemic began. Bankers and investors have said they fear the disruption a second wave of Covid-19 and volatility surrounding November's US election could bring, but they should not forget either that the UK is edging towards a no-deal Brexit at the end of 2020.

When GlobalCapital talks to bankers and investors about the risks for issuance over the rest of the year, Brexit barely features in conversations. This is understandable: why worry too much about the possibility of the UK leaving the European single market as a flashpoint when there are still Covid-19 fires to extinguish?

But, with the UK having said it will not extend a transition agreement that came into force once the country officially left the EU in January, the time when it it will leave the single market and customs union without a deal is looming.

There is no treaty, or even bare bones agreement, in place to ease trade between the UK and Europe and a full and comprehensive deal that can please both parties looks impossible.

UK corporates, which have already been battered by the pandemic, will be forced into a no-deal trading relationship with the EU unless the government either strikes an unbelievable deal or agrees to a fudge.

The suspicion felt in Europe towards Brexit Britain makes the first option unlikely. The second requires UK prime minister Boris Johnson to betray many of the voters who elected him in December.

For IPOs, it could mean a return of investor reticence to taking UK risk, if the country looks close to ending all formal trading accords with its closest economic partner. For UK corporates, capital raising could become more difficult with shareholders not only having to deal with the unknown effects of Covid-19 but also the damage that a potential no-deal Brexit will do to company balance sheets.

This further uncertainty could hinder companies’ ability to raise equity capital when they most need it, particularly if a firm is dependent on European trade and supply chains.

Financial markets in general also need to be prepared to deal with Europe without regulatory equivalence, or even any agreed cooperation on supervision and regulation.

On Tuesday, the Association for Financial Markets in Europe (AFME) urged the EU and UK to make progress on the negotiations and put in place equivalence decisions and the necessary arrangements to ensure a stable long-term relationship for financial services and minimise potential disruption. 

This seems a big ask given that both sides are still arguing over fish. Every day a no-deal Brexit is becoming more likely and UK financial services and corporates need to prepare for it.

By Sam Kerr
07 Jul 2020