The UK is due to exit the EU on 29 March 2019. The terms of the exit and the subsequent relationship with the EU are being negotiated. If it appears Brexit will produce an unexpected outcome, the appetite of banks to lend to affected businesses could change.
Businesses reliant upon a migrant workforce may be particularly vulnerable. Banks may anticipate EU citizens in the UK at the time of the referendum being allowed to continue to work in the UK. Although this is a possible outcome of negotiations, until an exit deal is agreed it is uncertain. If some EU citizens lose the right to work in the UK this could result in a substantial loss of labour. Although employees who have been exercising treaty rights in the UK for at least five years can apply for permanent residence, it is uncertain whether this will continue after the UK exits the EU.
Businesses reliant upon low-skilled migrant workers may be particularly concerned about migrant workers in the UK at the time of the referendum being able to continue to work in the UK if, post Brexit, new low-skilled migrant workers are only allowed to work in the UK for a limited period.
Banks may be less willing to lend to affected businesses until they produce sufficient post Brexit data to demonstrate their viability. Businesses with finance due to mature shortly after Brexit may be unable to refinance. If a business is unable to raise new finance to repay expired finance it may become insolvent.
Even if an exit deal allows EU citizens in the UK at the time of the referendum to continue to work in the UK, the Brexit process could still result in a loss of labour greater than anticipated. While an exit deal is being negotiated more migrant workers than anticipated may move to another EU country where there is less uncertainty.
Banks may fear an insufficient supply of domestic labour to fill more gaps than anticipated could lead to greater competition for staff causing higher wage costs. This could significantly reduce the profitability of affected businesses. If a business is unable to absorb the increased cost or pass it onto its customers the business may be forced to close.
Businesses not reliant upon a migrant workforce may also be vulnerable to a liquidity contraction if an exit deal is not as anticipated. For example, businesses which are reliant upon trading with businesses in the EU may be affected. Banks may anticipate an exit deal providing for trade without significant tariffs, but this is uncertain. If significant tariffs are imposed on goods exported from the UK banks may be less willing to lend to affected businesses until they produce sufficient post Brexit data to demonstrate their viability.
Macroeconomic factors may result in a reduction in the appetite of banks to lend to businesses which, at first sight, seem relatively immune to the impacts of Brexit. For example, further falls in sterling may lead to higher inflation, increased interest rates and decreases in asset values. This could affect the ability of many businesses to borrow. Higher interest rates would impact upon debt serviceability. Lower asset values would impact upon loan to value ratios.
If in the future banks consider the likelihood of one or more of these factors materialising to have increased, this may cause a liquidity contraction. A perception of an increased risk may cause a liquidity contraction, irrespective of whether the risk materialises.
Businesses with loans maturing in the next few years may wish to consider refinancing now, rather than risk there being less credit available in the foreseeable future. If there is less credit available businesses may have to pay more for it and accept less favourable covenants. Businesses may be unable to refinance and could become insolvent.