British companies with more than $130 billion of debt to refinance this year are facing rising funding costs as a no-deal Brexit looms, with yields on some bonds now akin to those in emerging markets. Carmaker Jaguar Land Rover highlighted the issues facing some UK corporates when it said recently it would not tap bond markets for the $1 billion it needs to repay maturing debt and plans alternative funding instead.
"Market conditions for issuing bonds presently are less favourable in general and with our bonds trading below par reflecting our recent financial performance," Jaguar Land Rover Treasurer Ben Birgbauer told Reuters. "Brexit uncertainty is clearly a contributing factor to the present weak market conditions."
Fitch Ratings put Jaguar Land Rover under review for a possible downgrade on February 5, citing Brexit risks. British companies sold just $478 million equivalent of bonds in January, Refinitiv data shows, down from $2.35 billion a year ago and marking the slowest start to the year in a decade.
That partly reflects a lacklustre outlook for the global economy. But Brexit risks are an additional complication for British firms, whose net debt is at a record high, according to consultancy Link Asset Services.
Many could find it challenging - and expensive - to roll over maturing debt, especially if Britain leaves the European Union without a transition period in place to minimise economic disruption. Investors already demand a "Brexit premium" of as much as 50 basis points more in yield to hold bonds of British companies over debt issued by European firms with similar credit ratings.
Paola Binns, senior fund manager at Royal London Asset Management, noted that Swiss insurer Zurich this week paid 275 basis points over German government debt to raise money. But investors demand a 400 bp premium over UK government bonds to buy debt from Britain's Prudential, also rated A, she said.
"It's not like-for-like but a rough idea of the sort of premium, the differential in funding costs between UK names and European names," said Binns, who foresees a disorderly Brexit adding 50-100 bps to financial sector borrowing costs.
A smooth exit that maintains close EU ties would dispel many of those concerns - a recent period of Brexit calm saw several UK firms issue bonds, including power operator National Grid's first sterling deal since 2013. But without clarity, investors and the bankers who manage companies' bond sales are wary.
"It's very challenging for UK corporates to issue, particularly in euros," one banker told Reuters. Citing a 500 million euro bond by InterContinental Hotels Group in November, he said: "That company went to great lengths to highlight their global model but many investors - primarily the French - just didn't want to take on a new UK name."
Speaking of the London Stock Exchange's bond last June, he said that while it was clearly a global name, "the 'London' in LSE did not help". The Bank of England reckons that leaving the EU without a deal will prove a bigger blow to the economy than the 2008-2009 financial crisis.
Many companies have already pre-financed debt and reduced exposure to vulnerable sectors such as real estate in preparation for Brexit, while big firms have the cushion of overseas earnings. Birgbauer said Jaguar Land Rover was considering receivables financing, leasing of new assets, export credit agency financing, and other potential bank financing transactions.
But as the March 29 departure date approaches, investors are jittery about a hard Brexit that tips the UK into recession, or a delayed Brexit that prolongs uncertainty and weakens sterling. A no-deal Brexit could be negative for the ratings of about 20 companies, S&P Global has warned - a tenth of the UK names it rates. It already has negative outlooks on half the 43 public-sector entities it rates - housing associations, universities and municipalities, all seen at risk of higher costs, lower revenues and the loss of EU funding.
The sterling bond market is friendlier to UK Plc but sectors reliant on it - utilities, housing and financials - are closely linked to the domestic economy. Some also face the risk of nationalisation under any future Labour government.
"There is an element of 'If you don't need to be in the sterling market and there is a fundamental problem with UK plc why would I want go into it?' In a nutshell, demand for UK names will reduce severely if you have fears of Brexit going wrong," said Ed Farley, head of the European corporate bond team at PGIM fixed income.
"I am not saying UK companies won't be able to fund, it just becomes more of a challenge, i.e. more expensive." Some cite National Grid's 250 million pound bond as proof UK plc still has buyers. It drew over 1.7 billion pounds of orders and priced with almost no concession to outstanding debt.
Rating agency Fitch sees autos, aerospace, real-estate, airlines and especially retail as most exposed to Brexit, although it expects most to weather the storm with hits to earnings and margins. Others such as Althea Spinozzi, fixed income specialist at SaxoBank see junk-rated sterling bonds as attractive, citing the examples of Aston Martin and Virgin Media with yields around 5-6 percent - akin to emerging markets.
"Philippines sold 10-year debt at around 3.80 percent - you can see why investors would be more familiar with British assets and would prefer to go there," Spinozzi said, though she added UK high-yield debt carried "an enormous degree of risk".
Asset manager Brooks MacDonald last month halved its holdings of investment-grade UK company debt in favour of government bonds. "There's not much liquidity in the asset class ... If lots of people ponder a similar move, it could be difficult to get out," Deputy Chief Investment Officer Edward Park said. "We're getting out first."
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