UK debt markets may see a huge impact from Brexit, as almost 60% of debt due over the next five years is denominated in currencies other than the pound. 

Potential impact on one-fifths of the European debt market

After more than 40 years of membership with the European Union, the UK triggered Article 50 on March 29 to formally begin the Brexit process. Since results were announced, the pound has plunged by more than 10% against the US dollar and 9.5% against the euro. The uncertainty looming over Brexit negotiations will likely have an impact on UK corporate debt, which is a significant contributor to European debt markets. For European corporate debt, the UK accounted for 28.6% (£65.1bn) of issuance so far this year and 20.1% (£800.4bn) of all outstanding debt.

Landscape of the UK debt markets

Over the next 5 years, outstanding debt from UK firms totals £383.5bn, with only 40.6% denominated in pounds. The rest is concentrated in US dollars (39.5%) and euros (18.6%). The combined share of dollar and euro debt will peak in 2018, when 51.1% of maturing debt will be denominated in dollars and 35.2% in euros.

A closer look at the 5-year debt landscape shows consumer products has the most outstanding debt by sector with £46.2bn — 80.5% (£37.0bn) denominated in dollars and 12.4% (£5.7bn) in euros. Telecommunications and oil & gas round out the top three, and both sectors hold more debt in dollars (£14.4bn and £23.7bn, respectively) and in euros (£11.0bn and £5.3bn, respectively) than in pounds (£9.2bn and £2.2bn, respectively). By type, investment-grade (IG) deals dominated volume, with less than half in pounds.

Consequences of a falling pound

Currencies other than the pound contribute to almost half of all outstanding debt for UK firms, with the portion growing to almost 60% for debt due over the next 5 years. With so much exposure to currency risk, companies (especially in sectors with the largest debt) may see a huge impact from the triggering of Article 50. The potential of a sharp increase in the real value of outstanding debt will further burden UK companies facing Brexit headwinds.

Contact us for the underlying data and analysis on the UK debt markets, or learn more about the Dealogic platform.

Data source: Dealogic, Oanda (Exchange Rates), as of March 28, 2017