Investors hooked on the bonds of companies such as Apple Inc. and Oracle Corp. may soon have to look for alternatives if a tax proposal from President-elect Donald Trump becomes reality.
Trump has said he'd temporarily slash the tax rate on funds repatriated to the U.S. by American companies to 10% from 35%, meaning cash-rich companies that according to Bank of America Corp. stash an estimated $860 billion to $1 trillion abroad may no longer need to turn to the bond market as a cheaper alternative to finance share repurchases.
The impact would be substantial. Apple has become the biggest nonfinancial corporate-bond issuer in the world as it raised more than $80 billion in just four years to finance share buybacks instead of repatriating the more than $200 billion of cash it holds overseas. Oracle sold $14 billion of bonds in June to partly support shareholders. Bank of America expects that if taxes on overseas cash held by American companies are reduced, bond sales will go down by $150 billion each year.
“A topic of discussion post the Trump victory is the repatriation of cash and what that does to some of the large tech companies that would refinance or raise money in our market,” said Todd Mahoney, head of fixed-income syndicate for the Americas at UBS Group. “That could be a driver of reduced volume.”
Technology and health care companies — holders of about 80% of all overseas cash — have sold $136 billion of bonds this year for purposes other than acquisitions, according to data complied by Bloomberg. Apple has issued almost $24 billion of bonds this year in the U.S. largely to buy back equity. Despite its reliance on the bond market, Apple is sitting on a mountain of funds. Its overseas cash pile is more than eight times larger than the amount of bonds it sold this year, company filings show.
After the last tax holiday was passed in 2004, nonfinancial investment-grade bond sales plunged by about 30%, according to UBS strategists. Now, though, that market is almost three times larger, according to Bloomberg Barclays index data.
So long as investors are still clamoring for company debt as issuance falls, a smaller supply year may mean yields above Treasuries that are already near the lowest in a year may tighten even further. But not all bond investors are convinced.
“The market is a lot bigger than it used to be,” said Tom Murphy, a money manager at Columbia Threadneedle Investments in Minneapolis. “If more supply equals wider spreads, spreads should be at infinity.”
The clearest winners in a post-Trump bond market are probably CFOs such as Kelly Kramer of Cisco Systems Inc. The world's largest maker of networking equipment has issued about $13 billion of bonds this year in part to boost shareholders.
“We're encouraged that something will happen,” Kramer said on a call to discuss earnings on Nov. 16. The company keeps more than $57 billion of its cash abroad, according to regulatory filings.
“We have many, many scenarios of what we would do when repatriation comes,” Kramer said. “We recognize it'll certainly give us a lot more flexibility.”
Bloomberg News
Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.
Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
- Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
