Cash Management

Corporate Cash Piling up as Brexit Vote Nears

A  vote would cost U.S. based-companies money in currency swings, a shrinking market for their wares, and possible relocation costs, experts say.
David KatzJune 21, 2016

While there’s a great deal of uncertainty about whether the United Kingdom will vote to leave the European Union this Thursday, there’s almost no doubt that a pro-Brexit result would be a downer for U.S.-based multinationals. And while no one is comparing the situation to the 2008-2010 financial crisis, there is similar talk of the importance of retaining large amounts of liquid cash during such volatile times.

As of today, an average of the six most recent polls revealed that U.K. voters  against Brexit trailed by just two points those who are for it. For the many companies who regard London as the chief access point for doing business in Europe, a “leave” vote would cost U.S.-based companies money in currency swings, a shrinking market for their wares, and possible relocation costs, experts say.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Indeed, no matter how the vote turns out, many companies could be affected by the jittery currency market for the British pound Sterling that’s arisen in the wake of the controversy. “For the CFOs of U.S. multinational corporations, even if they don’t even have a supply chain or a logistical part of their business in the United Kingdom but have something [going on] in Europe as a whole, then they will be affected either way by the vote come Thursday,” says Jeremy Cook, the London-based chief economist and head of currency strategy at World First, a currency trading firm.

“The main reason for that is the currency volatility that we are expecting to see. Sterling is the main instrument in which the market will take out its uncertainty,” Cook said yesterday. “We’re forecasting that sterling could fall as much as 10% against the U.S. dollar on Friday if we do see a BREXIT vote.”

On the other hand, if there’s a vote to remain in the European Union, “we’re forecasting that there probably will be a bounce in the value of the pound by roughly 3% or 4% over the course of that Friday,” says Cook.

“We’re going to see the pound volatile in either direction. If it falls, U.S. exports as against exports against the U.K. are going to be hurt. If it rises, any company that imports from the U.K.” will be hit with cost hikes, he adds.

With all that volatility, Cook observed, “I wouldn’t be surprised if corporate treasurers and CFOs are putting more cash into their balance sheets, thus making themselves more liquid.”

That tendency is just the latest version of a more widespread flight to cash, he noted, citing a survey reported on by Reuters last week about a Bank of America Merrill Lynch survey of fund managers.

“Investors have amassed their largest cash pile since 2001 and cut equity holdings to a four-year low, rattled by worries over Brexit and policymakers’ ability to bolster a fragile global economy,” the news agency reported. “Investors are willing to hold more cash in their portfolios than at any time since November 2001.”

The BAML survey of 213 fund managers steering $654 billion “showed that Britain leaving the European Union was the by far biggest ‘tail risk’ for world markets,” with 30% of the survey respondents saying so, according to the Reuters story.

“Everybody’s putting a little bit of cash in their back pocket to ride out any storms around the corner. This is why we have seen such a poor level of investment in the past couple of years. [Investors have] been sitting on huge piles of cash for when the world has started to turn,” Cook said. “People just want safety.”

Another area of uncertainty that has arisen around cash is whether U.S. multinationals should repatriate it in the event of a Brexit. The U.S. tax system has long deterred U.S. based firms from bringing their overseas cash back onshore. Now, however, there are new worries. CFOs and treasurers of American multinationals looking to pull their cash out of Britain “have to think about [whether] the pound Sterling will appreciate,” says Ana Boata, European economist for Euler Hermes, a trade-credit insurance company. “If I repatriate $5 billion and there’s an appreciation of 20%, it would be worth a lot less.”  

The decision about whether to repatriate the cash or invest in Britain or elsewhere in the European Union depends on the longer term-term strategy of MNCs headquartered in the United States but with significant operations in the United Kingdom.

If there is a Brexit and the exchange cost in repatriating cash is high, “maybe they’ll repatriate less,” adds Boata.

“I don’t think they would invest in the U.K because the opportunities would be much less after an exit. They may decide to invest elsewhere in Europe,” she says, “and progressively locate there.”

Another big worry for U.S. companies is the loss of the U.K. as a financial services gateway with open access to the European Union. “If the U.K. leaves the EU, it raises the question regarding whether or not licenses issued by the European Central Bank will still be valid for a company operating in the U.K.  While existing arrangements may not be impacted, new ones likely will,” André Malinowski, head of international business at Computop, a cross-border payments processing firm, told CFO in an email.

“Brexit would force banks to reassess their European operations as a whole. With the U.K. opting out of the EU, it would move both transactions and jobs out of the U.K. Banks would no longer have the right to provide services to other locations in Europe,” says Malinowski.

“All services that had been provided from London to the rest of Europe may become obsolete. While this may be good for other European cities, it would have a major negative impact on London, and ultimately would impact U.S. merchants with U.K.-based operations,” he adds.

Export loss by country-01