Brexit and managing currency risk

Although the final outcome of Brexit is uncertain, the sterling and euro volatility remains a key concern and challenge for Irish businesses

 

Enterprise Ireland’s Brexit Unit is supporting companies to better understand the financial implications of currency fluctuations on their business and take the necessary actions to mitigate against this risk. The following questions cover the key issues related to the management of currency risk and are addressed by John Finn of Treasury Solutions.

 

I’m an Irish company exporting to the UK. How can I analyse the impact of movements in sterling/euro on my business?

For Irish companies exporting to the UK, the Enterprise Ireland Currency Impact Calculator can help you understand the effect of movements in the sterling/euro exchange rate on your business. This online tool is freely available and demonstrates what an adverse change in exchange rates would have on your business profitability.

 

Will my bank permit me to hedge my foreign currency exposures?

For an exporter to hedge its currency risk, in the first instance, it must first have a foreign exchange line of credit from the bank. This must be formally sought in advance prior to its use and, from the bank’s perspective, it is the equivalent of making a loan application i.e. it requires credit approval.

 

What instruments will the bank permit me to use to manage foreign currency risk?

For the most part, this is restricted to either spot or forward transactions. The former implies selling sterling at the current market rate.

As a general rule, spot deals settle in two days’ time ie agree a rate on Monday with funds transferring on Wednesday. In the case of forward foreign exchange contracts, a rate can be agreed today to apply to receipts on a future date.

The advantage of this instrument is that an exporter can bring certainty to the amount of euro that it will receive in return for a specified amount of sterling at this stated future date.

The primary disadvantage is that there is no opportunity to share in any upside in any currency movement.

In order to achieve that objective, it is possible to purchase an instrument known as a foreign exchange option. However caution is urged; it is an extremely useful instrument to utilise in managing foreign exchange risk, but it needs to be constructed appropriately. In essence, it is an insurance product for which the purchaser pays a premium and which protects it against a worst possible (defined) outcome whilst permitting full participation in the upside should it arise.

Some banks sell a combination of an option and forward contract called a participating forward. This allows participation in a fixed percentage of the upside. However it does have a cost. Again, these should not be purchased without full knowledge and understanding of what is involved.

 

How far forward can I hedge?

Most banks will have a maximum time period for which they will sell forward contracts to their customers. This needs to be ascertained now. In general, most banks will not provide forward contracts for periods beyond 12 months.

 

What terms and conditions apply?

In some cases, the banks may require security to be provided in the form of charges over assets or guarantees. If the exporter is already a borrower, it is probable that the bank would simply extend any security that it already had over the foreign exchange line. It may also monitor the extent to which the currency contracts are showing a “profit” or “loss” at a point in time and either limit this or seek some collateral, which may include cash, if the loss – although only theoretical – extends beyond the defined amount.

Finally, some banks may require the completion of what is known as an ISDA agreement. This is quite a complex document to complete for the first time, and proper advice should be taken in its construction and prior to signing it.

One final point to note in hedging foreign currency risk is that there are non-bank providers of such services who tend to be less prescriptive in their dealings. However, many borrowing agreements now specify that the borrower may only conduct foreign currency transactions with the lender.

 

What are the wider financial implications associated with currency risk?

The obvious effect of weakening sterling is adverse consequences for both profitability and cash flow. Immediate actions that could be taken include:

  • Calculation of the exchange rate at which UK sales are no longer profitable
  • Rerunning financial forecasts at current exchange rates and assessing the projected outcomes
  • Where financial covenants are part of your borrowing agreement, ensure that adverse foreign exchange moves do not materially and negatively impact on compliance with them

Please note that where companies with material amounts of UK exports intend to refinance their banking facilities in the coming months, a significant amount of sensitivity analysis will be required in any financial projections provided to banks.

I would strongly urge paying close attention to the terms and conditions attaching to any new borrowing agreements, as I would expect banks to tighten up significantly in this area as a consequence of the UK vote to exit the European Union.

Email BrexitUnit@enterprise-ireland.com with your queries on currency fluctuations.

 

How Brexit will impact intellectual property

Joe Doyle, Intellectual Property Manager, Enterprise Ireland outlines the impact Brexit will have on Intellectual Property

 

There are many seismic shifts predicted in the UK’s future relationship with the EU. Some are quite apparent, but others are below the surface and don’t receive the same level of public attention. Intellectual Property (IP), for example, may appear to be a side issue to more pressing political and economic concerns but IP is, in fact, fundamental to trade and innovation within and across borders.

A study by the European Union Intellectual Property Office (EUIPO) attributed 28% of jobs (60 million) in the EU to IP intensive industries. That accounts for 42% (€5.7 trillion) of total EU economic activity and 90% of EU trade with the rest of the world. The study showed that, in Ireland, IP intensive industries accounted for 24% of employment and contributed to 53.8% of GDP.

 

How Brexit impacts intellectual property

 

So how does Brexit affect IP? Fundamentally, IP is territorial i.e. IP rights (IPR) only apply in the territories where the IP is registered or legally recognised. If the territory changes, then so too does the IPR. In recent years, attempts have been made to harmonise IP frameworks across the EU to give companies predictable and efficient protection for their innovation throughout the economic area. For example, the EU Trade Mark (EU TM) and the Registered Community Design (RCD) are IP protections that apply across the whole EU territory via a single application, thereby reducing cost and administration. The implication of Brexit, for companies trading in the UK and relying on EU-wide IP, is what happens when the UK falls outside the EU territory? To put it another way, in IP terms, Brexit means the earth (or part of it) will effectively move.

Thankfully, the UK and EU negotiation teams are Pre-empting ahead of this and aim to ensure that companies will retain equivalent protection in the UK post-Brexit.  According to the draft Withdrawal Agreement, the negotiating parties have agreed that owners of EU TMs and RCDs, granted before the end of the transition period in 2020, will automatically get an equivalent right in the UK. However, it’s not so straightforward. For example, issues such as how the UK re-registration procedure will work in practice, and who will pay UK fees, are not yet agreed.

Furthermore, there are several unregistered forms of IP where things are potentially even less predictable. Unregistered rights refer to things like copyright, trade secrets, and unregistered designs, the protection of which depends very much on certain legal frameworks and institutions in each member state. The intention, post Brexit, is that the UK will replicate EU directives, but due to legal and institutional complexity, it may not be possible to achieve harmony in the presence of a border.

 

What will Brexit mean for patents?

 

Of course, there is also the issues of patents. The withdrawal agreement is silent on this one, largely because the European Patent Office is not an EU institution. However, the EU Unitary Patent and Unified Patent Court, which have been the subject of a 40-year EU negotiation (take note Brexit negotiators), are due to come into force later this year. As Brexit has significant implications for these, their future is uncertain.

 

What can I do to prepare?

 

No one can predict how the post Brexit IP world will look but attempts are being made to patch over the fault lines. Early tremors have passed largely unnoticed but the ‘IP earth’ beneath exports to the UK will move. Maybe the main event will even pass unnoticed, but the aftershocks may be severe and long lasting, and by then it might be too late do something about it.

So, while there is still some time, Irish companies trading with the UK, and with IP protection in the UK, need to engage with their legal and IP advisors to ensure their IP Strategies are Brexit-proof. Companies should start by conducting an IP audit to identify what IP is protected and what is not, review IP terms in agreements and contracts, identify risks and threats etc. Then, they should work closely with their IP advisors to develop sound IP Strategy that takes account of the immediate and long-term risks posed by Brexit. This may include filing IP protection in the UK in case the EU and UK do not reach full agreement.

 

Learn more about Enterprise Ireland’s Brexit supports here.