Brexit update – check the covenants!

We are on the run into the referendum. The polls have switched from Remain to Leave but scepticism of their reliability remains from the last General Election and with the random effect of uncertain levels of turn out.

What we do have, and what we can expect more of, is market volatility, particularly if the vote is to exit.

A reminder to treasurers, not that of course it should be needed, is to consider the covenant calculations and particularly for those who have a half-year or year-end at 30 June, in the white heat of uncertainty.

The “point-of-time” volatility may lead to short term distortion of exchange rates which could adversely affect the financial covenant calculations for businesses with multi-currency debt. The period end rate may spike, average rates may also be distorted away from the average through the period end.

Some sensitivity testing may help to prepare the lenders and rating agencies should the calculated covenant prove challenging.

Otherwise, little else to report:

• If the UK Brexits, the devil will be in the detail of the re-negotiation of trade deals, with all trade parties and not just the EU through which we have all our trade agreements.

• The UK constitutional process, such as exists, may provide plenty of opportunity for dissenting MPs to stall the formal process should a Brexit be the referendum decision. The process is believed to be: referendum vote; parliamentary vote; and then the Prime Minister of the moment writes the exit letter to EU. Only at that point will the exit negotiations start in earnest.

• And keep in mind that should we stay in, the UK will rely on “non-discrimination” wording should the Euro zone members accelerate banking union with the long run risk that London’s Euro business must anyway follow the Euro.