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Financial Advisory June 2016
Brexit Webinar
One week on - weighing up the outlook
2
Nick Edwards
Head of Restructuring Services
3
Reaction To Date
2.6%
(6.1%)
1.1%
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
-
1.0%
2.0%
3.0%
4.0%
FTSE 100 FTSE 250 FTSE 350
FTSE 100, 250 and 350 % change since 23 June
Source: London Stock Exchange
(5.0%)
(8.8%)
(7.3%)
(4.6%)
(10.0%)
(9.0%)
(8.0%)
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
-Germany Italy Spain France
European markets, % change since 23 June
Source: Bloomberg
1.25
1.30
1.35
1.40
1.45
1.50
1.55
Apr May Jun
GBP USD FX Rate
Last 3 months 1 year averageSource: oanda.com
1.15
1.17
1.19
1.21
1.23
1.25
1.27
1.29
1.31
1.33
1.35
Apr May Jun
GBP EUR FX Rate
Last 3 months 1 year averageSource: oanda.com
4
Introduction
Panel
Nick Edwards
Head of UK Restructuring Services
Ian Stewart
Deloitte Chief Economist
Iain Macmillan
Global M&A Lead
Fenton Burgin
Head of UK Debt Advisory
Henry Nicholson
Restructuring Services
5
Ian Stewart
Deloitte Chief Economist
6
Dollar sterling exchange rate
Market effect: £ down…but not like ‘81, ’92, ‘08
Brexit
Failure of Lehman
ERM crisis
1980-81 recession
7
Heightened uncertainty => lower appetite for risk
Deloitte CFO Survey: risk appetite and levels of uncertainty
Latest reading,Mar ‘16
Latest reading,Mar ‘16
8
-8
-6
-4
-2
0
2
4
6
Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17
Remain GDP Leave GDP
Economists forecast knock to UK GDP in ‘16 and ‘17
UK real GDP profile (YoY%), actual and consensus forecasts
Remain2015 2016 2017 2018-26 avg.
GDP 2.3 1.9 2.1 2.1Investment 4.1 2.0 4.4 2.7
Leave2015 2016 2017 2018-26 avg.
GDP 2.3 1.4 0.4 2.1Investment 4.1 0.2 -1.6 2.0
Consensus Economics forecasts, % chg yoy, actual, forecast
9
Why this isn’t Lehman? Not a banking crisis
3m LIBOR-OIS spread – measure of additional cost of interbank lending over the risk-free rate
10
Why this isn’t Lehman? UK fundamentals good
Heritage Foundation World BankWorld Economic
Forum
#1 Hong Kong Singapore Switzerland
#2 Singapore New Zealand Singapore
#3 New Zealand Denmark United States
#4 Switzerland South Korea Germany
#5 Australia Hong Kong Netherlands
United
Kingdom10 6 10
Sweden 26 8 9
Poland 39 25 41
Spain 43 33 33
France 75 27 22
Italy 86 45 43
Greece 138 60 81
Business Index and Heritage Foundation Index of Economic Freedom
*Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business, stronger protections of property rights and lower corruption.
11
Possible alternatives to EU membership
EU member
EEA
(Single
Market only)
EFTA
(Free Trade
Agreement)
Customs
UnionMFN ‘Duty-free’
28 European member nations
Norway, Liechtenstein,
Iceland
Swiss Turkey Australia Monaco, Singapore
Free movement of goods, services,
and capitalYes Yes Yes No No No
Free movement of people Yes Yes Yes No No No
Free to negotiate trade deals and
set tariff levels with non-EU
countries
No Yes Yes No YesIn principle,
but slower
EU laws and
regulation
Influence Yes Very limited No No No No
Compliance Yes Yes
Yes, but
some opt-
outs
Some No No
Fiscal contributions Yes
Yes
(83% of full
rate)
Yes
(52% of full
rate)
No No No
Common Agricultural Policy (CAP) Yes No No No No No
No single template for life outside the EU
12
UK politics and policy
1. Uncertainty elevated but below peak; long haul change; back to business
2. 2016-17, GDP slows, possibly sharply, skates recession
3. Behind the scenes: UK mulls aims, Brexit administration
4. New Prime Minister elected September 9th 2016
5. Article 50 triggered Q4’16/H1’17
6. UK & EU negotiate 2017-2019/20
7. Trade off: access to Single Market, free movement of people
8. New deal emerges in next 2 years, uncertainty abates
9. Long term: UK trend growth broadly unchanged around 2.2%
Political and administrative challenge
13
EU faces multiple challenges
Step-up integration?
Multi-speed Europe?
Muddle through?
1.
2.
3.
4.
Brexit, further secessions
Slow growth
Migration, borders
Fixing the euro
Challenges Response
14
Iain Macmillan
Global M&A Lead
15
Global economic slowdown has been impacting M&A markets
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
% pointsIMF revision in GDP forecast for 2016, January vs
April
Source: World Economic Outlook, April 2016
6
7
8
% pointsChina Real Quarterly GDP (Annual YoY%)
Source: Bloomberg
100
200
300
400
500
2011
M1
2011
M3
2011
M5
2011
M7
2011
M9
2011
M11
2012
M1
2012
M3
2012
M5
2012
M7
2012
M9
2012
M11
2013
M1
2013
M3
2013
M5
2013
M7
2013
M9
2013
M11
2014
M1
2014
M3
2014
M5
2014
M7
2014
M9
2014
M11
2015
M1
2015
M3
2015
M5
2015
M7
2015
M9
2015
M11
2016
M1
2016
M3
2016
M5
United Kingdom Economic Policy Uncertainty Index
Slowdown in China Slower than expected recovery in global economy
Political uncertainty
Resistance from regulatory authorities
There is a drop in M&A values in Q1 2016, compared to the same period last year
As the result deal activities have fallen in H1 2016
0500
10001500200025003000350040004500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$ bi
llion
Global M&A deal values H1 vs H2 2006-16
16
0
50
100
150
200
2012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q22014 Q32014 Q42015 Q12015 Q22015 Q32015 Q42016 Q12016 Q2
Dis
clos
ed d
eal
valu
es (
$bn)
Scottish Referendum
UK General Election
-48%
75%
EU referendum
-45%
Uncertainty is a key factor influencing M&A, particularly in UK in recent months Impact of uncertainty on UK M&A market
17
Headwinds - UK Policy uncertainty index is at record levels
0
50
100
150
200
250
300
350
400
450
0
1000
2000
3000
4000
5000
6000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016LTM
UK economic policy uncertainty index
Deal volumes
Domestic volumes Inbound volumes
Outbound volumes UK Economic policy uncertainty index
Iraq War
Coalition Government
Fuel panic
London riots
BREXIT
Banking crisis
UK involved deal volumes vs UK policy uncertainty index
18
Headwinds
depreciated after the Brexit announcement, registered a 31-yr low against the dollar
11%
Potential impact of GBP fall on M&A
2001 crisis 2008 crisis
Pound depreciation 3% 26%
YoY % change in UK involved deal volumes
-36% -40%
YoY % change in UK involved deal values
-7% -31%
1
1.2
1.4
1.6
1.8
2
2.2
0
200
400
600
800
1000
1200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
UK pound spot rate
UK target deal volumes
UK targeted deal volumes vs UK pound
Deal volumes UK pound spot rate
-36%
3%
3% CAGR 2011-13
-40%
-26%8% CAGR 2011-13
-6% CAGR 2013-15
30% CAGR 2013-15
Currency fluctuations will have some opportunistic impact, but M&A still relies on underlying fundamentals of the business and growth prospects
19
Tailwinds
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Real Estate Funds
Retailers
Financial services
Banks
Life insurance
Household goods
Travel
Auto
Telecom
Support services
Electricity
Industrial transport
Food producers
Constructuion
Software
Metals
Media
Chemicals
Forestry and paper
Oil equipment
Electronics
Engineering
Mobile
Aerospace
Beverages
Mining
Tech Hardware
Healthcare equipment
Utilities
Personal goods
Oil and gas
Tobacco
Pharm
a
FTSE 350 movers% change since Jun 23
85
90
95
100
105
110
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
FTSE 100 and FTSE 250 indices performance
FTSE 100 Index FTSE 250 Index
5X
7X
9X
11X
13X
15X
17X
19X
21X
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
FTSE 100 and FTSE 250 P/E multiple
FTSE 100 FTSE 250
17%
22%
35%
26%
FTSE 100 – sales bygeography
20%
12%
19%
49%
FTSE 250 – sales by geography
74%
51%
Continental Europe North America Rest of World UK
20
What next?
Long term investment decision
Immediate impact somewhat limited
Measured response
UK only event
International investors are seeking opportunities
Clarity on trade terms
Uncertainty means processes may elongate
Protect value on potential divestments
Refinancing
Private Equity activity
21
Fenton Burgin
Head of UK Debt Advisory
22
Debt Movements
• Banks
• All lenders
• Bonds
23
Henry Nicholson
Restructuring Services
24
RS Outlook
KEY FACTORS
• Interest rates
• Business investment
• Consumer confidence
• Debt market availability
Impact will be felt over various horizons
FX impact on covenants
FX on trading if unhedged
Failed financing / M&A
Impacts of changes in exchange rates, investment activity and economic growth felt in covenants and liquidity
Changes in lending relationships post Brexit
Impact of changed financial services landscape
Changes in public sector funding post Brexit
3 months 24+ months
25
RS Outlook
These effects can be seen in share prices today
(29.0%)
(17.6%)
(17.0%)
(2.4%)
(13.2%)
(25.1%)
(0.9%)
(8.9%)
(6.2%)
(30.5%)
(35.0%) (30.0%) (25.0%) (20.0%) (15.0%) (10.0%) (5.0%) -
Housebuilders
Real Estate
Construction
Food and Drink
General Retail
Banks (ex. HSBC and SC)
HSBC and Stan Chart
Leisure (ex. Compass)
Other travel
Airlines
FTSE All-Share sector impact from 23 to 29 June
Source: Bloomberg
26
Restructuring Outlook
Conversations with clients
Treasury
managementFinancing
optionsM&A Outlook
Performance
Improvement
Supplier risk
management
Location
strategyManaged exit
Financial
distress
27
Q&A
28
Contact Information
Nick Edwards
Head of UK Restructuring Services
0207 007 3013
Ian Stewart
Deloitte Chief Economist
0207 007 9386
Iain Macmillan
Global M&A Lead
0207 007 2975
Fenton Burgin
Head of UK Debt Advisory
0207 303 3986
Henry Nicholson
Restructuring Services
0207 007 4009
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