This year, tax reform could give U.S. companies access to hundreds of billions of dollars they have stashed overseas. Many corporations can't wait that long.
Apple Inc. and Microsoft Corp. sold a total of $27 billion of debt this week to fund their daily operations, repay maturing debt and buy back shares. Those bond sales might be unnecessary if new tax laws come this year because under President Donald Trump's proposed plan, companies could pay a one-time 10% levy to bring back money held overseas, less than a third of the current rate.
Apple CEO Tim Cook told investors this week that he was “confident” that “some sort of tax reform” would be coming this year. But until it goes into effect, borrowing is still the best bet for many companies, said Jordan Chalfin, an analyst at debt research firm CreditSights.
“They can't bank on the repatriation until it actually happens,” Chalfin said. “For now, there's a real need for cash.”
Cash Needs
Take Microsoft. As of the end of 2016, it had some $25.1 billion of short-term debt known as commercial paper that will mature by the end of September, a number that swelled after its $26.2 billion purchase of LinkedIn. It had just around $6.5 billion of cash in the U.S., according to company regulatory filings. Issuing corporate bonds will help it refinance some of those near-term obligations.
Apple has more stateside cash than Microsoft — about $16 billion at the end of 2016 — but it also has plans for returning another $49 billion to shareholders. Last quarter, Apple spent $15 billion on dividends and stock buybacks.
Whenever companies can bring back cash, corporate bond issuance will likely drop, by as much as $150 billion a year, Bank of America Corp. estimated in November. That's equal to more than 10% of the U.S. investment-grade debt issued last year, according to data compiled by Bloomberg. The companies with the most overseas cash tend to be in the technology and pharmaceutical industries.
It's not clear how soon tax reform will come. A number of published analyst notes in recent days have raised questions about Trump's ability to implement his promises in the time frame previously expected. Senior Congressional aides told Reuters that spring 2018 might be a more likely time frame for tax reform to be passed.
“While our base case remains that Republicans can execute a tax reform-driven fiscal stimulus on or around the third quarter of 2017, we concede that execution risks are rising,” Morgan Stanley's chief U.S. economist Ellen Zentner and her team wrote in a note last month.
If tax reform does happen this year, companies could be allowed to repatriate their overseas cash in 2017, according to Ed Mills, a financial policy analyst at FBR Capital Markets.
Almost Immediately
The U.S. last saw a tax holiday under a 2004 law. As part of that legislation, companies were allowed to bring back foreign earnings for one tax year at essentially a rate of 5.25% if they reinvested the funds in programs like worker hiring or capital investments. Although that holiday had a time frame of a single tax year, a program like the House Republicans' could be implemented almost immediately, and last at least 10 years, Mills said.
For now, companies don't mind heading back to the debt markets, considering the low yields and minimal volatility, said Dave Novosel, a bond analyst at research firm Gimme Credit.
“Markets are still pretty good. Why not take advantage of it?” Novosel said. “A month from now, or two months from now, things might not be as good depending on what happens with Trump and Congress.”
Bloomberg News
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