Britain’s landmark vote on June 23 to leave the European Union led to global market volatility and an immediate shock to the world economy. The Pound Sterling value dropped – and has dropped further since – to lows not seen in 20 years. In North America, the Canadian dollar also saw devaluation, given the country’s strong trade ties to the U.K. While the U.K. adjusts to new leadership and determines the next steps to exit the EU, there will undoubtedly be a continued impact on the U.S. economy. Now is the time for middle-market companies to consider what this means for their financing needs and prepare accordingly.
According to TD Economics, the independent research arm of TD Bank, the U.S. sends about 5 percent of its goods to the U.K., which could take a hit as the pound loses value. Consumer demand for U.S. products and services may decline in the coming quarters, as Britain seeks to negotiate new trade agreements. This is a particularly troubling scenario for middle-market companies that do business with the U.K. and the Eurozone, as it could limit growth opportunities in the near future. The devaluation of the pound and euro also drives up the prices of U.S. exports while reducing the revenue generated within Britain and Europe by U.S. middle-market companies. This may lead to cash flow problems for companies that rely heavily on trade and exports.
While the full implications of Brexit remain to be seen, the U.S. is positioned to cope with economic volatility in the long term.
As companies consider what volatility in the debt and equity markets means for them, midsize companies can begin to cope with Brexit’s effects now. Here are three ways executives can make sound financial decisions in light of the political and economic turmoil in the U.K.:
- Maintain solid cash flow. It’s crucial for midsize companies to ensure they have a plan to maximize returns and build a liquid cushion to weather any continued downturn. As officials negotiate the terms for Brexit, global markets may endure more volatility, meaning companies will want to keep cash on hand.
- Seek additional credit. After estimating cash flow, companies should determine if additional capital is needed. For companies in a position to borrow, credit is historically cheap with no expectation of interest rate increases in the near term. A loan or line of credit for working capital may be a good way for many businesses to cushion any Brexit impact.
- Evaluate international M&A prospects. Middle-market companies considering an overseas acquisitions should carefully assess the terms before pursuing a transaction. Organizations need to consider asset valuation, currency exchange and the potential trade environment when evaluating if a deal is prudent.
Britain’s exit from the EU also puts further strain on overall merger and acquisition activity. While Brexit is not the sole source of reduced growth, it will be a contributing factor as we look toward the third and fourth quarters of 2016. Despite the fact that interest rates remain historically low worldwide and there is ample liquidity across most sectors, overall M&A volume is down in 2016. Economic instability, coupled with uncertainty at home about the November election and potential policy changes, are keeping transactions low. Adding Brexit to these dynamics means restraint in deals will continue as many of these worldwide economic factors will not be resolved soon.
While the full implications of Brexit remain to be seen, the U.S. is positioned to cope with economic volatility in the long term. Judicious investments by middle-market companies can help them protect their businesses – and even thrive – during changing economic conditions.
William Fink is the executive vice president, chief lending officer, and head of credit management for TD Bank’s Regional Commercial Banking Group, where he supervises the Bank’s $50 billion-plus commercial and small business portfolios.