Firms Hedging Against Risk of No-Deal Brexit

S&P reports that companies are implementing contingency measures including inventory boosts, warehouse relocations, and supply chain adjustments.
Matthew HellerFebruary 12, 2019
Firms Hedging Against Risk of No-Deal Brexit

Industrial companies are preparing for a possible no-deal Brexit by boosting inventories, relocating warehouses, and adjusting supply chains, according to S&P Global Ratings.

The credit rating agency said its analysis of corporate earnings calls showed a “substantial pre-Brexit surge in inventories held by companies selling into and out of the U.K.”

Among specific companies, LVMH has added four months’ supply to U.K. wine and spirit inventories; Unilever has added just under 500 million euros to inventories (although some of that is not Brexit-related); and Imperial Brands has set aside 30 million pounds of contingency stocks.

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“The ongoing risk of a no-deal Brexit poses significant risks to cross-border logistics chains and companies have triggered contingency plans in response,” Gareth Williams, senior director at S&P, said in a news release “This implies upward pressures on working capital, which could have an adverse impact on free cash flow and debt reduction plans.”

“Should a no-deal Brexit occur, companies most exposed to cross-border supply chains may need a sustained increase in working capital until future trade arrangements are settled, with a consequent increase in credit risk,” he added.

The British government and the European Union have yet to reach a trade deal ahead of the Brexit deadline on March 29.

According to S&P, businesses are also contingency planning by enhancing their U.K. supply chains. Hitachi, for example, has been trying to increase local procurement as much as possible for its railway systems business and has now reached a local production level of 70%.

“The flipside to this will be European companies that currently have U.K. products as part of their supply chain and decide to switch to EU-domiciled suppliers to reduce logistical risks,” S&P noted.

A third strategy is to add warehouses in the U.K., the EU, or both. S&P cited ScanSource, a U.S.-based technology product distributor that plans to open a new warehouse in the U.K. to meet local demand, using inventory transferred from Belgium.