Deal-Makers Face Feast or Famine After Brexit Vote
June 17 2016 - 10:11AM
Dow Jones News
By Margot Patrick
U.K. deal makers are readying for feast or famine.
Depending on the outcome of next week's vote in Britain to stay
in or leave the European Union, mergers and stock and bond sales
could surge or hit their lowest levels since the financial crisis,
bankers, lawyers and investors say.
Already, uncertainty over "Brexit" caused a slump in U.K.
initial public offerings this year as many companies decided to
wait out the vote. Worries over the future direction of the pound
meant companies and banks also issued only a fraction of their
normal volume in sterling-denominated bonds, Dealogic data
show.
Would-be dealmakers fret that a vote to leave the EU would sink
the pound and lead to an economic slowdown in the U.K., skewing the
valuations of acquisition targets, first-time issuers and bond
sales. At the same time, some say a "remain" vote could cause the
pound to spike, at least temporarily. Both prospects have kept
market participants in wait-and-see mode as the vote
approaches.
An Ipsos MORI poll for the Evening Standard published Thursday
found 53% want to leave and 47% want to stay, but whether it's just
wishful thinking or not, many people working in finance still
expect the U.K. to stay in the EU.
Now that the day of reckoning is near, mothballed deals are
getting dusted off in the hopes that the outcome of the vote will
be "remain."
One such deal is a GBP2 billion ($2.86 billion) issue of
additional tier-1 bonds from Royal Bank of Scotland Group PLC.
Chief Financial Officer Ewen Stevenson said in February the bond
sale would have to wait until the second half of the year, because
of uncertainty around the Brexit vote. The plan is still on track,
subject to market conditions, a bank spokesman said earlier this
week. The bonds won't necessarily be denominated in sterling.
"There is clearly a belief that there will be a remain vote
amongst market participants, so you have a number of quite large
deals that are getting ready to be released after the referendum
because the expectation is there will be relief rally," said Philip
Smith, a partner at Allen & Overy.
Conversely, an exit vote "will leave a fair number of investors
having to figure out what to do with their portfolios and focusing
on that instead of new opportunities," Mr. Smith said.
Britain voting to leave the European Union would rattle
financial markets, and likely prompt investment firms and banks to
move parts of their businesses outside the U.K. Most economists
agree the U.K. economy would slow, the pound would sink and many
companies would have to rethink at least some aspects of their
businesses.
Yet in bond markets, the main concern for investors appears to
be currency risk rather than worries about the financial health of
U.K. companies, credit analysts at Deutsche Bank said this
week.
"Brexit risk is more of a currency story and less of a case of
the underlying U.K. credit risk," the analysts wrote in a report
about how bonds from U.K. and global companies were faring in
euros, dollars and sterling.
Companies that could issue in a currency other than sterling
"will have chosen that option," said Robert Montague, senior
investment analyst at ECM Asset Management. A remain vote could
bring more supply in sterling, he said, if the pound rallies as
expected.
Write to Margot Patrick at margot.patrick@wsj.com
(END) Dow Jones Newswires
June 17, 2016 09:56 ET (13:56 GMT)
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