While recent changes to the US tax code are significant, any negative impact on corporate bond issuance will be felt mainly by non-financial speculative-grade firms, S&P said in a research report Thursday.
The following are highlights of the report.
- Some companies will almost certainly use increased cash to reduce their overall debt; most newly available funds will be used for stock buybacks, increased dividends, mergers and acquisitions and increased capital investments.
- The repatriation measure will have a minimal to modest impact on non-financial issuance.
- It is likely any repatriated money - overseas cash is estimated to be roughly US$1.1trn - will be used for increased M&A, continued share repurchases and increased dividends, as opposed to deterring opportunistic borrowing amid currently low interest rates.
- The removal of the net interest deduction has the potential to discourage debt issuance in the long run. But given the current makeup of the corporate bond market, this effect will be modest in aggregate.
- The companies most vulnerable to this proposal would be in the lowest rating category of CCC/C, given that their average and median debt burdens are quite large.
- A lower corporate tax rate could reduce the need for borrowing and promote more investment, particularly in combination with the accelerated depreciation and capital expenditure write-off schedules included in the reform package.
- While most points of the tax package discourage the use of debt by corporations, the impact in sum may prove muted, at least for the time being. By and large, the companies most likely to benefit are investment-grade industrial and service credits, along with many financial institutions.
