Giants move on tax cuts
Bond buybacks to save millions
Big US companies don’t know how American tax laws will be changed in the coming months, but they’re not waiting to find out.
Comcast Corp, 3M Co and WalMart Stores are among the companies buying back bonds now in transactions that could save them millions of dollars if the latest proposed tax changes from the Trump administration and Congress end up becoming law. A wave of these deals happened after the election as Republicans talked about tax changes being high on their priority list. More of these transactions are happening now as the lawmakers and the White House renew their focus on overhauling the rules.
“If you’re a company and you don’t do it, you’ll regret it,” said Tim Doubek, a Minneapolis-based money manager at Columbia Threadneedle. “There’s no downside to doing it.”
Wal-Mart is buying back up to US$8.5 billion of debt, and on Wednesday sold US$6b of bonds in six parts to help finance that repurchase. Blue-chip companies have sought to buy back an eye-popping US$178.5b of bonds so far this year, compared with $87.3b at the same point last year, according to data compiled by Bloomberg. Much of that activity is driven by possible tax changes, Doubek said. But these transactions make sense even without tax reform, because they often allow companies to lock in lower rates on debt and push back the dates they would have to repay their borrowings.
The refinancing underscores how companies are looking to wring as much benefit as they can out of current tax laws even as they stand to benefit from future changes. Under current laws, corporations can deduct all of their interest payments from their taxable income. Republicans are considering l i miting t hat deductibility, and lowering the standard corporate tax rate to 20 per cent from 35 per cent.
Companies that buy back their higher-interest debt in the coming weeks will pay more than the face value for this debt, which amounts to pre-paying interest on those securities. They can fully deduct those payments from their tax bills at current higher rates.
“With tax reform, these transactions are definitely becoming more attractive,” said Ajay Khorana, global head of Citigroup’s financial strategy and solutions group. “Borrowers are trying to be proactive.”
Details of any tax overhaul are still hazy. The framework for tax reform that Republicans released on September 27 said only that interest deductions “will be partially limited,” for example. Representative Kevin Brady, chairman of the House Ways and Means Committee, said before the release of t he proposal t hat lawmakers plan to grandfather existing debt when it comes to deducting interest expenses, but if corporate tax rates decline, companies would get less benefit from that full deduction than they can get now.
The timing for any law to be passed is unclear. The 1986 tax reform took around two years to hammer out. This time around, Republicans hold both chambers of Congress, but control the Senate by only a slim majority. Donald Trump faces ideological demands from Senator Rand Paul of Kentucky and is feuding with Senator Bob Corker, who wants tax cuts that don’t add to the deficit. The President has had previous difficulty with votes from Senators Susan Collins of Maine and Lisa Murkowski of Alaska. Brady said yesterday that overhaul is still on track for this year. —