`Brexit' Warnings Crop Up in Bond Offerings as Disruptions Seen

  • HSBC, EasyJet among issuers listing separation as a debt risk
  • Sterling-debt borrowing costs rise after referendum date set

Companies are stepping up warnings to investors that a British exit from the European Union may eat into revenue and cut the value of their securities.

HSBC Holdings Plc has flagged a so-called ‘Brexit’ as a potential risk for buyers of its bonds. Cardiff University in Wales and low-cost airline EasyJet Plc have also said that uncertainty over membership in the bloc may disrupt operations. The risk is especially pronounced among borrowers in the U.K., though European firms are also on alert.

In bond-sale prospectuses and other documents, issuers are citing potential risks from legal changes after an exit. Investors are demanding higher premiums to hold top-rated sterling-denominated bonds compared with those in euros. Voters will decide on the U.K.’s future in the EU at a June 23 referendum. 

“We’re entering a prolonged period of uncertainty, and uncertainties are bad for credit,” said David Newman, head of high yield at Rogge Global Partners in London, which manages more than $30 billion. “As the risk of Brexit increases, those who don’t need to buy sterling will probably reduce or exit. That may make it harder for some companies to refinance.”

HSBC has listed Brexit alongside risks such as bank rescue events and fallout from a rates-rigging investigation in recent bond documents. The referendum may prompt changes to U.K. laws that affect the rights of bondholders, result in additional costs and even trigger debt redemptions, it warned. 

Cardiff University’s sale of 300 million pounds ($422 million) of 3 percent bonds due 2055 came with a caveat that a vote to leave might reduce the number of students enrolling from EU countries as they may be expected to pay higher tuition fees in a non-EU nation. University of Leeds in England warned in documents for a 250 million-pound debt sale last month that a leave vote may harm research funding and recruitment.

EasyJet included Brexit uncertainty as a risk in documents for its debut bonds issued in euros last month, saying the outcome could adversely affect its business. A spokesman said the company had plans to mitigate the risk. National Australia Bank Ltd. also flagged the risk in a debt-sale prospectus.

“Right now, it’s difficult to provide legally for what might happen in a Brexit scenario,” said Mairead Duncan-Jones, a lawyer at Linklaters LLP. “There are so many unknowns.”

Treasurers Worried

Brexit is worrying European companies too. Treasurers are studying what precautions they can make for a go-it-alone U.K., according to speakers and participants at the Association of Corporate Treasurers’ European conference in Dusseldorf, Germany, last week.

Currency volatility and changes to tax and import tariffs top concerns of European treasurers, with some considering stress-testing the impact of a separation on their businesses and investigating how well their banks and suppliers will cope, said Michelle Price, associate policy and technical director at London-based ACT.

Allied Irish Banks’ marketing material for 500 million euros ($554 million) of so-called additional Tier 1 securities highlighted Brexit as a contagion risk that could adversely affect the group, the Dec. 1 document shows. 

Polls signal the referendum will be tight. A March 14 survey for Telegraph Newspapers shows 49 percent in favor of a Brexit and 47 percent against while one for YouGov poll on March 4 showed 40 percent wished to remain, 37 percent wished to leave and 18 percent were undecided.

Perceived credit risk among bonds denominated in pounds rose to a record relative to their euro-issued counterparts as British Prime Minister David Cameron clinched a deal with EU leaders that paved the way for a referendum. 

The extra yield investors demand to hold highly rated sterling-denominated debt due between three and five years exceeded the yield premium for similarly rated bonds in euros by 63 basis points, the most in more than three years, according to Bank of America Merrill Lynch index data on Feb. 18. The difference is now 48 basis points.

The potential impact of a Brexit would be significant, but “a fair degree of a risk premium has already been priced in the sterling credit markets,” said Lyndon Man, a fund manager at Invesco Ltd., which manages $737.5 billion.

“Whilst we should rightly be mindful about the risks of an exit, we should also be concerned of the risk of material spread tightening should the U.K. choose to remain,” said Man, who still invests in pound-denominated debt, but prefers bonds from issuers domiciled outside the U.K.

The inclusion of Brexit among listed risk factors is a precautionary measure to protect issuers, according to Matthew Hartley, a capital markets partner at Allen & Overy LLP in London.

“With risk factors, you’re saying to bondholders these risks exist,” Hartley said. “If one of the risks is realized it’s then more difficult for a bondholder to sue.”

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