Financial Advisory June 2016

Brexit Webinar

One week on - weighing up the outlook

2

Nick Edwards

Head of Restructuring Services

3

Reaction To Date

2.6%

(6.1%)

1.1%

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

-

1.0%

2.0%

3.0%

4.0%

FTSE 100 FTSE 250 FTSE 350

FTSE 100, 250 and 350 % change since 23 June

Source: London Stock Exchange

(5.0%)

(8.8%)

(7.3%)

(4.6%)

(10.0%)

(9.0%)

(8.0%)

(7.0%)

(6.0%)

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

-Germany Italy Spain France

European markets, % change since 23 June

Source: Bloomberg

1.25

1.30

1.35

1.40

1.45

1.50

1.55

Apr May Jun

GBP USD FX Rate

Last 3 months 1 year averageSource: oanda.com

1.15

1.17

1.19

1.21

1.23

1.25

1.27

1.29

1.31

1.33

1.35

Apr May Jun

GBP EUR FX Rate

Last 3 months 1 year averageSource: oanda.com

4

Introduction

Panel

Nick Edwards

Head of UK Restructuring Services

Ian Stewart

Deloitte Chief Economist

Iain Macmillan

Global M&A Lead

Fenton Burgin

Head of UK Debt Advisory

Henry Nicholson

Restructuring Services

5

Ian Stewart

Deloitte Chief Economist

6

Dollar sterling exchange rate

Market effect: £ down…but not like ‘81, ’92, ‘08

Brexit

Failure of Lehman

ERM crisis

1980-81 recession

7

Heightened uncertainty => lower appetite for risk

Deloitte CFO Survey: risk appetite and levels of uncertainty

Latest reading,Mar ‘16

Latest reading,Mar ‘16

8

-8

-6

-4

-2

0

2

4

6

Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17

Remain GDP Leave GDP

Economists forecast knock to UK GDP in ‘16 and ‘17

UK real GDP profile (YoY%), actual and consensus forecasts

Remain2015 2016 2017 2018-26 avg.

GDP 2.3 1.9 2.1 2.1Investment 4.1 2.0 4.4 2.7

Leave2015 2016 2017 2018-26 avg.

GDP 2.3 1.4 0.4 2.1Investment 4.1 0.2 -1.6 2.0

Consensus Economics forecasts, % chg yoy, actual, forecast

9

Why this isn’t Lehman? Not a banking crisis

3m LIBOR-OIS spread – measure of additional cost of interbank lending over the risk-free rate

10

Why this isn’t Lehman? UK fundamentals good

Heritage Foundation World BankWorld Economic

Forum

#1 Hong Kong Singapore Switzerland

#2 Singapore New Zealand Singapore

#3 New Zealand Denmark United States

#4 Switzerland South Korea Germany

#5 Australia Hong Kong Netherlands

United

Kingdom10 6 10

Sweden 26 8 9

Poland 39 25 41

Spain 43 33 33

France 75 27 22

Italy 86 45 43

Greece 138 60 81

Business Index and Heritage Foundation Index of Economic Freedom

*Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business, stronger protections of property rights and lower corruption.

11

Possible alternatives to EU membership

EU member

EEA

(Single

Market only)

EFTA

(Free Trade

Agreement)

Customs

UnionMFN ‘Duty-free’

28 European member nations

Norway, Liechtenstein,

Iceland

Swiss Turkey Australia Monaco, Singapore

Free movement of goods, services,

and capitalYes Yes Yes No No No

Free movement of people Yes Yes Yes No No No

Free to negotiate trade deals and

set tariff levels with non-EU

countries

No Yes Yes No YesIn principle,

but slower

EU laws and

regulation

Influence Yes Very limited No No No No

Compliance Yes Yes

Yes, but

some opt-

outs

Some No No

Fiscal contributions Yes

Yes

(83% of full

rate)

Yes

(52% of full

rate)

No No No

Common Agricultural Policy (CAP) Yes No No No No No

No single template for life outside the EU

12

UK politics and policy

1. Uncertainty elevated but below peak; long haul change; back to business

2. 2016-17, GDP slows, possibly sharply, skates recession

3. Behind the scenes: UK mulls aims, Brexit administration

4. New Prime Minister elected September 9th 2016

5. Article 50 triggered Q4’16/H1’17

6. UK & EU negotiate 2017-2019/20

7. Trade off: access to Single Market, free movement of people

8. New deal emerges in next 2 years, uncertainty abates

9. Long term: UK trend growth broadly unchanged around 2.2%

Political and administrative challenge

13

EU faces multiple challenges

Step-up integration?

Multi-speed Europe?

Muddle through?

1.

2.

3.

4.

Brexit, further secessions

Slow growth

Migration, borders

Fixing the euro

Challenges Response

14

Iain Macmillan

Global M&A Lead

15

Global economic slowdown has been impacting M&A markets

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

% pointsIMF revision in GDP forecast for 2016, January vs

April

Source: World Economic Outlook, April 2016

6

7

8

% pointsChina Real Quarterly GDP (Annual YoY%)

Source: Bloomberg

100

200

300

400

500

2011

M1

2011

M3

2011

M5

2011

M7

2011

M9

2011

M11

2012

M1

2012

M3

2012

M5

2012

M7

2012

M9

2012

M11

2013

M1

2013

M3

2013

M5

2013

M7

2013

M9

2013

M11

2014

M1

2014

M3

2014

M5

2014

M7

2014

M9

2014

M11

2015

M1

2015

M3

2015

M5

2015

M7

2015

M9

2015

M11

2016

M1

2016

M3

2016

M5

United Kingdom Economic Policy Uncertainty Index

Slowdown in China Slower than expected recovery in global economy

Political uncertainty

Resistance from regulatory authorities

There is a drop in M&A values in Q1 2016, compared to the same period last year

As the result deal activities have fallen in H1 2016

0500

10001500200025003000350040004500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ bi

llion

Global M&A deal values H1 vs H2 2006-16

16

0

50

100

150

200

2012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q42014 Q12014 Q22014 Q32014 Q42015 Q12015 Q22015 Q32015 Q42016 Q12016 Q2

Dis

clos

ed d

eal

valu

es (

$bn)

Scottish Referendum

UK General Election

-48%

75%

EU referendum

-45%

Uncertainty is a key factor influencing M&A, particularly in UK in recent months Impact of uncertainty on UK M&A market

17

Headwinds - UK Policy uncertainty index is at record levels

0

50

100

150

200

250

300

350

400

450

0

1000

2000

3000

4000

5000

6000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016LTM

UK economic policy uncertainty index

Deal volumes

Domestic volumes Inbound volumes

Outbound volumes UK Economic policy uncertainty index

Iraq War

Coalition Government

Fuel panic

London riots

BREXIT

Banking crisis

UK involved deal volumes vs UK policy uncertainty index

18

Headwinds

depreciated after the Brexit announcement, registered a 31-yr low against the dollar

11%

Potential impact of GBP fall on M&A

2001 crisis 2008 crisis

Pound depreciation 3% 26%

YoY % change in UK involved deal volumes

-36% -40%

YoY % change in UK involved deal values

-7% -31%

1

1.2

1.4

1.6

1.8

2

2.2

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

UK pound spot rate

UK target deal volumes

UK targeted deal volumes vs UK pound

Deal volumes UK pound spot rate

-36%

3%

3% CAGR 2011-13

-40%

-26%8% CAGR 2011-13

-6% CAGR 2013-15

30% CAGR 2013-15

Currency fluctuations will have some opportunistic impact, but M&A still relies on underlying fundamentals of the business and growth prospects

19

Tailwinds

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Real Estate Funds

Retailers

Financial services

Banks

Life insurance

Household goods

Travel

Auto

Telecom

Support services

Electricity

Industrial transport

Food producers

Constructuion

Software

Metals

Media

Chemicals

Forestry and paper

Oil equipment

Electronics

Engineering

Mobile

Aerospace

Beverages

Mining

Tech Hardware

Healthcare equipment

Utilities

Personal goods

Oil and gas

Tobacco

Pharm

a

FTSE 350 movers% change since Jun 23

85

90

95

100

105

110

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

FTSE 100 and FTSE 250 indices performance

FTSE 100 Index FTSE 250 Index

5X

7X

9X

11X

13X

15X

17X

19X

21X

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

FTSE 100 and FTSE 250 P/E multiple

FTSE 100 FTSE 250

17%

22%

35%

26%

FTSE 100 – sales bygeography

20%

12%

19%

49%

FTSE 250 – sales by geography

74%

51%

Continental Europe North America Rest of World UK

20

What next?

Long term investment decision

Immediate impact somewhat limited

Measured response

UK only event

International investors are seeking opportunities

Clarity on trade terms

Uncertainty means processes may elongate

Protect value on potential divestments

Refinancing

Private Equity activity

21

Fenton Burgin

Head of UK Debt Advisory

22

Debt Movements

• Banks

• All lenders

• Bonds

23

Henry Nicholson

Restructuring Services

24

RS Outlook

KEY FACTORS

• Interest rates

• Business investment

• Consumer confidence

• Debt market availability

Impact will be felt over various horizons

FX impact on covenants

FX on trading if unhedged

Failed financing / M&A

Impacts of changes in exchange rates, investment activity and economic growth felt in covenants and liquidity

Changes in lending relationships post Brexit

Impact of changed financial services landscape

Changes in public sector funding post Brexit

3 months 24+ months

25

RS Outlook

These effects can be seen in share prices today

(29.0%)

(17.6%)

(17.0%)

(2.4%)

(13.2%)

(25.1%)

(0.9%)

(8.9%)

(6.2%)

(30.5%)

(35.0%) (30.0%) (25.0%) (20.0%) (15.0%) (10.0%) (5.0%) -

Housebuilders

Real Estate

Construction

Food and Drink

General Retail

Banks (ex. HSBC and SC)

HSBC and Stan Chart

Leisure (ex. Compass)

Other travel

Airlines

FTSE All-Share sector impact from 23 to 29 June

Source: Bloomberg

26

Restructuring Outlook

Conversations with clients

Treasury

managementFinancing

optionsM&A Outlook

Performance

Improvement

Supplier risk

management

Location

strategyManaged exit

Financial

distress

27

Q&A

28

Contact Information

Nick Edwards

Head of UK Restructuring Services

0207 007 3013

nedwards@deloitte.co.uk

Ian Stewart

Deloitte Chief Economist

0207 007 9386

istewart@deloitte.co.uk

Iain Macmillan

Global M&A Lead

0207 007 2975

imacmillan@deloitte.co.uk

Fenton Burgin

Head of UK Debt Advisory

0207 303 3986

fburgin@deloitte.co.uk

Henry Nicholson

Restructuring Services

0207 007 4009

hnicholson@deloitte.co.uk

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