Liquidity in the market remains strong as high street lenders are increasingly joined by alternative debt providers such as challenger banks and family offices. Despite this variety, there is caution in the market, a sentiment that is likely to be exacerbated by the outcome of the recent general election. Many borrowers are sticking to what they know and making the most of existing funder relationships.
Although some debt arrangements will extend beyond the scheduled Brexit date of 29 April 2019, it is unlikely that they will terminate automatically as a result of Article 50 being triggered.
Typically, a termination would only be considered on these grounds if specific Brexit termination clauses had been included in an agreement (which has been unusual).
Some aspects of existing facilities are expected to be affected by Brexit. Increased costs provisions are likely to be relevant and typically allocate risk to the borrower rather than the lender. There are elements of banking arrangements driven by EU laws (such as the Financial Collateral Regulations, COMI, bail-in and jurisdiction/enforcement of judgments) that may change or be otherwise affected once Brexit takes place.
However, it is too early to be able to make provision for the post-Brexit position in funding agreements as the terms are still unknown. This will need to be kept under review as negotiations continue.
As ever, economic factors and strategic business decisions will drive financing decisions. The hung parliament has triggered a dramatic fall in confidence of business leaders and it remains to be seen whether the government can take steps to assuage their concerns.
Borrowers are likely to value certainty of funding in the uncertain post-election and post-Brexit era. However, lenders will be mindful of the impact of market volatility on a borrower’s business and the value of their collateral. Anticipated fluctuations in currency valuations will raise the importance of managing exchange rate exposure.
The strongest post-Brexit relationships are likely to be formed by an open dialogue between the parties – so at least there are no surprises there.
Kirsty Barnes is a partner at Gowling WLG.