Brexit-Exit or Reverse-Brexit? What Impact Will the New Ruling Have on The Middle Market?

Posted on: December 15th, 2016

Just after 23 June 2016, when the United Kingdom voted to end its 43-year-old membership with the European Union (EU), doom and gloom was predicted for the UK economy. Since then, the pound is down dramatically but economic growth appears stable in the UK.

Many economists pre-brexit expected a significant negative impact on the UK economy, but so far these predictions have not materialized. The economy continued to show growth of .5% in the three-month period post-Brexit.

Ultimately, the longer term growth rate may well decline; especially in light of the confusion created in the market from the recent Parliament decision. Yet, the need for Parliamentary approval of the Brexit plan could well provide the guard rails to facilitate a soft landing.

Prime Minister May will likely be able to fashion an exit plan that gives the UK short term relief of onerous EU restrictions combined with long term value of quasi EU market inclusion.

The U.K. is witnessing an adjustment

All current signs point to the trend of the UK witnessing an adjustment to leaving the EU. The pound while declining is certainly not seeing a disorderly collapse.

Secondly, while the uncertainty over Brexit makes it slightly less credit-worthy for foreign investors, the government will still have the privilege to borrow all it wants, and still pay less than the United States. Thirdly, while inflation has risen it still remains less than 1%.

This points to the fact that the market is simply doing what markets do best, which is adjusting prices quickly to take advantage of changing realities.

The impact on the US middle market

The decrease in the pound has made UK assets more attractive, making it a great time for mergers and acquisitions and for US buyers of British firms.

On the flip side, US middle market companies will have to seek alternative inroads into Europe, as London will no longer be a gateway to the EU.

While Brexit is a fascinating geopolitical event, it is likely to have little to no effect on middle market companies based in the US.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.