Whilst politics gets all the attention, what is going on in the economy? Tonight all eyes will be on the House of Commons as MPs vote on the Brexit deal. Whether or not the deal is approved, tomorrow we have the Chancellor of the Exchequer's Spring statement - setting out latest economic and fiscal forecasts and plans.
On the eve of these events in Parliament, here is a short summary of what my colleagues and I are seeing in the UK's mid-market - in terms of corporate finance and Brexit preparations.
Deals, investors and lenders
In the mid-market, access to debt funding is extremely difficult in construction and mining, very difficult in retail (and anything consumer facing with a retail front) and increasingly difficult in automotive dealerships and supply chain. Nonetheless, high quality credits and very good asset coverage situations continue to attract good offers of funding, irrespective of sector. Debt liquidity and PE liquidity remain at record levels, with no sign of easing off, and continue to underpin market activity.
In equity markets and amongst investors, uncertainty over Brexit is having an impact. Having held up through the autumn and over the new year, the volume of deals has been noticeably easing back since early February.
Equity markets for new issues are dead – both IPOs (we did complete one last week – the exception that proves the rule) and other primary capital market issues.
In private equity, the focus is on closing 2018 deals as soon as possible. Pipelines for new deals look thin and likelihood of new deal completions in the first half of 2019 looks slim. Activity in the second half of the year will very much depend upon whether uncertainty lifts quickly.
We are seeing an unprecedented number of enquiries and projects about taking rapid cost out of the business to hedge against future market disruption. Most are targeting at least 10% reductions.
Across mid-market and larger corporates, in manufacturing and retail, clients have invested in stockpiling in the U.K. (parts, raw materials) and EU to enable continued production and sales in the events of a No Deal Brexit in Q2. Here the focus of Brexit preparations is supply chain and logistics. We are seeing significant activity in manufacturing and retail to review customs and indirect tax processes and costs.
Employers continue to face skills shortages in many sectors and are looking at how to retain and recruit talent over the coming months as well as business continuity actions to ensure continued deployment of people across EU-UK borders in the event of No Deal Brexit.
Whilst most businesses are focused on business continuity plans and ensuring regulatory compliance in the event of a no-deal Brexit, an increasing number are also looking at medium term cost mitigation and longer-term competitive opportunities.
It all hangs in the balance. If there is a Brexit Deal tonight, the short term uncertainty will start to clear; whilst there may be a 'hangover' of No Deal planning in the economy, confidence should see an uplift, perhaps tempered in the medium term by ongoing political change. The continued liquidity in PE and debt capital should support a bounce back.
If there is no agreement and we see a delay to Brexit, 'limbo' conditions will continue a while longer. And should political events move decisively towards No Deal we can expect market shocks.
Where we are heading may be come into focus by the end of this week - with clarity by next week's EU leaders summit (21/22 March). It is possible the Chancellor will need to revise tomorrow's Spring statement economic forecast and fiscal plans before the end of this month….
“The lack of clarity on crucial aspects of how companies will operate after 29 March, as well as the possibility of a no-deal Brexit, has led many firms having to take drastic action to safeguard their operations, which has resulted in unnecessary costs, diversion of resources and loss of business, subduing overall economic activity.