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Tuesday, 24 October 2017

US tax reform acts as upside catalyst for investors: UBS

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The initial US tax reform framework is just a starting point for negotiations, but the prospect of US tax legislation has helped pushed US credit spreads near their tights of the year, UBS said in a report on Wednesday.

Here are highlights from the report:

- The prospect of US tax reform has provided a strong tailwind to US credit markets in recent weeks. Since September 25, US IG and US HY credit spreads have tightened 6bp and 8bp, respectively

- On lowering the corporate tax rate to 20% or 25%, UBS believes US IG firms will receive a 4%-8% boost to cash flow. US HY firms will receive a larger 7%-10% increase, given these firms pay higher tax rates than global IG firms

- US IG firms are more sensitive to changes in final corporate tax rates. US HY firms are more sensitive to changes in capital investment expensing assumptions

- Lower corporate tax rates and a full expensing of capital investment would offset a complete removal of corporate interest tax deductibility. UBS finds that most US IG and US HY firms will not be impacted by a loss of interest tax deductibility. Highly levered, CCC-rated US HY, though, could face a loss to cash flow under certain scenarios

- US IG issuance in tech and high-quality pharma/consumer will likely drop post repatriation as firms holding significant offshore cash will have less need to issue domestic debt

- A removal of policy uncertainty could lead to an increase in US M&A activity, and by extension long-duration IG issuance from other sectors with little offshore cash holdings

 

 

 

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