Deal-Makers Face Feast or Famine After Brexit Vote

By Margot Patrick 

U.K. deal makers are readying for feast or famine.

Depending on the outcome of next week's vote in Britain to stay in or leave the European Union, mergers and stock and bond sales could surge or hit their lowest levels since the financial crisis, bankers, lawyers and investors say.

Already, uncertainty over "Brexit" caused a slump in U.K. initial public offerings this year as many companies decided to wait out the vote. Worries over the future direction of the pound meant companies and banks also issued only a fraction of their normal volume in sterling-denominated bonds, Dealogic data show.

Would-be dealmakers fret that a vote to leave the EU would sink the pound and lead to an economic slowdown in the U.K., skewing the valuations of acquisition targets, first-time issuers and bond sales. At the same time, some say a "remain" vote could cause the pound to spike, at least temporarily. Both prospects have kept market participants in wait-and-see mode as the vote approaches.

An Ipsos MORI poll for the Evening Standard published Thursday found 53% want to leave and 47% want to stay, but whether it's just wishful thinking or not, many people working in finance still expect the U.K. to stay in the EU.

Now that the day of reckoning is near, mothballed deals are getting dusted off in the hopes that the outcome of the vote will be "remain."

One such deal is a GBP2 billion ($2.86 billion) issue of additional tier-1 bonds from Royal Bank of Scotland Group PLC. Chief Financial Officer Ewen Stevenson said in February the bond sale would have to wait until the second half of the year, because of uncertainty around the Brexit vote. The plan is still on track, subject to market conditions, a bank spokesman said earlier this week. The bonds won't necessarily be denominated in sterling.

"There is clearly a belief that there will be a remain vote amongst market participants, so you have a number of quite large deals that are getting ready to be released after the referendum because the expectation is there will be relief rally," said Philip Smith, a partner at Allen & Overy.

Conversely, an exit vote "will leave a fair number of investors having to figure out what to do with their portfolios and focusing on that instead of new opportunities," Mr. Smith said.

Britain voting to leave the European Union would rattle financial markets, and likely prompt investment firms and banks to move parts of their businesses outside the U.K. Most economists agree the U.K. economy would slow, the pound would sink and many companies would have to rethink at least some aspects of their businesses.

Yet in bond markets, the main concern for investors appears to be currency risk rather than worries about the financial health of U.K. companies, credit analysts at Deutsche Bank said this week.

"Brexit risk is more of a currency story and less of a case of the underlying U.K. credit risk," the analysts wrote in a report about how bonds from U.K. and global companies were faring in euros, dollars and sterling.

Companies that could issue in a currency other than sterling "will have chosen that option," said Robert Montague, senior investment analyst at ECM Asset Management. A remain vote could bring more supply in sterling, he said, if the pound rallies as expected.

Write to Margot Patrick at [e-mail]

(END) Dow Jones Newswires

June 17, 2016 09:56 ET (13:56 GMT)

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