Brexit Is Making It Hard to Buy British Companies

(Bloomberg) -- Risks around the U.K.’s planned exit from the European Union are making it hard to get sterling-denominated loans, an obstacle for companies that want to buy British assets, people familiar with the matter said.

About $3.8 billion in deals for U.K. businesses and assets have been announced so far this year, according to data compiled by Bloomberg. That’s down 76 percent from the same period in 2018 and on track to be the worst January for the market since 2012, the data show.

There have been no leveraged sterling loans or bonds priced this year in Europe, according to the data. Bonds sales in sterling fell sharply last year as prospects of a disorderly U.K. exit from the EU boosted volatility and made raising funds expensive.

Financing Risks

  • Private equity firm Apollo Global Management LLC has had to fund the bulk of its possible offer for British packaging maker RPC Group Plc with euro and dollar loans, the people said, asking not to be identified because the details are private. Apollo and RPC extended their negotiations for the fifth time last week and are due to announce a decision on Wednesday.
  • A small portion of RPC’s deal is likely to be financed in sterling, though the loans will be more expensive than those in other currencies, according to the people.
  • Some auctions that have fallen through recently -- including British asset sales by Melrose Industries Plc and United Technologies Corp. -- can be blamed on reluctant lenders, two of the people said. Bidders failed to secure financing to increase their offers and eventually dropped out of the running, they said.
  • United Technologies said this month that it halted the sale of its Chubb fire-safety and security business due to “the recent market volatility.” The effort stalled after bids from prospective buyers came in below expectations, people familiar with the matter said at the time.
  • Melrose said in its September financial results that while it’s been exploring options for its powder metallurgy business, it isn’t required to divest the business.
  • Representatives for United Technologies and Melrose declined to comment beyond their earlier statements. Apollo declined to comment.
  • All eyes will be on how the loan financing for the buyout of catering business WSH Investments Ltd. and a refinancing for Independent Vetcare Ltd. will fare when they’re launched to the market in the coming weeks.

Brexit Damage

Bank lenders remain reluctant to underwrite U.K. company risk because of fears that the U.K. may crash out of the EU without a deal or that Brexit will damage the country’s economy. British Prime Minister Theresa May’s deal -- negotiated over 18 months -- was rejected this month by Parliament in the biggest defeat for a leader of the country in modern history.

Now as she returns to the negotiating table with a March 29 deadline looming, companies are stockpiling goods and bond market investors are fleeing from shorter maturities.

CME Group Inc. will move its foreign-exchange forwards and swaps venue, which has trading volumes of about $15 billion a day, from London to Amsterdam, while Cboe Global Markets Inc. will shift most European equities trading to its market in the Dutch capital after Brexit.

High-Yield Market

Jeff Mueller, a London-based portfolio manager at Eaton Vance Management, whose firm oversees $439 billion in assets, said sterling is still attractive on a valuation basis, but the path to returns could be bumpy given the range of outcomes for Brexit.

Companies willing to pay the higher funding costs can access the high-yield market for sterling. At least two borrowers have mandated banks for issuance, but a timeline for the transactions is not clear, three people with direct knowledge of the matter said this month.

"We continue to focus on bonds issued in sterling and trading at the valuation discount of the sterling market, but whose business models will be largely unaffected by Brexit, regardless of the outcome,” Mueller said.

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