Future generations are certain to remember Friday, June 24, 2016 as the date that the United Kingdom by referendum elected to exit the European Union. Call it “Brexit” or “Leave,” the election results roiled the global markets and invoked the ire of more than one European leader. ABL Advisor took the occasion to speak with Paul Beveridge, Managing Director of PNC Business Credit in the UK, to better understand Brexit’s potential ramifications on the asset-based lending marketplace both immediately and in the coming months.
We began by asking Beveridge to share about PNC Business Credit’s operations in the United Kingdom. “I would say that we are very similar to our U.S. counterparts in terms of how we go to market, the types of customers we are looking for and the structures we do,” Beveridge begins. “We are middle-market focused, non-investment grade with 65% to 75% of our deals being private equity owned.”
Beveridge also notes that ABL deals range from 10 million GBP up to 100 million GBP with the average deal size being in the neighborhood of 23 million GBP. He notes, “Depending on the exchange rate you use, we are very similar to our U.S. colleagues in terms of averages. At the same time, we don’t do some of the larger transactions and that’s because there aren’t the deeply available sources for broadly syndicated transactions … we don’t have as many market participants as one has in the U.S.”
In terms of sectors financed by PNC Business Credit UK, Beveridge explains the unit does “old economy” type transactions with its largest sector being equipment rental, comprising approximately 15% of PNC’s UK book.
Brexit: The Matter at Hand
As for the matter at hand – Brexit – we asked Beveridge to comment on the immediate impact the event portends for he and his 40-plus colleagues at PNC in London, as well as for the ABL marketplace at large. Beveridge says, “Let me begin by saying that anytime you have some type of marketplace disruption to the orderly way things are done, it’s generally of benefit to asset-based lenders. In the broadest sense, the more turbulence there is, the more ABLs can expect to see an uptick in business opportunities. When you experience low growth and overall stability, it’s not always quite so easy. When any disruption hits, people begin to think twice about how they will do deals. Actually, I expect that in the coming months we’ll be seeing more business opportunities as opposed to fewer.”
In the longer term, Beveridge advises that much will be determined by the deal that is struck between the European Union and other European countries. “You have to remember, nothing happens until we trigger Article 50, which terminates the arrangement and that could take a couple of years or longer for that to happen.” That being said, Beveridge expects that the process will begin sooner rather than later.
In terms of Brexit’s effect on borrowers, Beveridge says much depends on their business models. He states, “If you’re an exporter with a mixed model, meaning you manufacture in the UK and you sell in the UK as well as export a decent amount, then the recent Brexit issue is most likely a positive because sterling has depreciated about 15% against the dollar and a little bit against the euro. This makes our exports a lot more competitive.”
“On the other hand,” Beveridge notes, “If you’re an importer, you have a higher cost to the goods coming in … so there may be a bit of inflation coming in. For us, our borrowers are solid companies with good products. They will continue to do things the way they’ve always done them … they won’t be affected.”
We asked Beveridge if Brexit has sent borrowers scrambling to line up their financing. He comments, “I don’t think there has been any impact in that regard. The Bank of England has already loosened some of the requirements on banks in terms of capital in the short term to provide an extra 150 billion GBP of liquidity. The Central Bank is going out of its way to make sure that there’s enough liquidity in the system so businesses can have access to capital. That’s a good sign and I don’t think there’s any crunch here at the moment.”
As for the impact on cross-border deals going forward, Beveridge notes there will be opportunities to either win or lose. He says, “There are certainly opportunities for U.S. corporate sponsors to buy UK companies and quite possibly into other European companies. It’s more difficult for UK companies because of the change in the valuation of the GBP. It all depends where you are with regard to the transaction … it’s certainly easier for inward investment because assets are cheap at the moment.”
A Sanguine Outlook
In spite of the turmoil, Beveridge maintains an optimistic view for the future. “It’s important to remember that we are still in the European single market and we’ll continue to be there for a while. One concern could be: Will our customers be able to export to those markets once we move away from the single market? There’s a lot of speculation out there, but I’m reasonably sanguine about that. One thing people may be overlooking is that the UK is much more a net importer in relation to its trade with the European Union.”
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