Big U.S. companies don’t know how American tax laws will be changed in the coming months, but they’re apparently not waiting to find out.
Comcast Corp., 3M Co. and Wal-Mart Stores Inc. 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. None of the companies explicitly mentioned tax overhaul, but a wave of these deals happened after the election as Republicans talked about those 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 modifying 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 on Wednesday issued bonds to help buy back as much as $8.5 billion of higher-yielding debt. By doing that, it’s essentially pre-paying interest that it would have otherwise doled out over years, which it can deduct from its 2017 taxes. If companies don’t do these transactions, tax reform could cut the value of those deductions by millions of dollars, in part because lower corporate rates reduce the benefit of a deduction.
Blue-chip companies have sought to buy back an eye-popping $178.5 billion of bonds so far this year, compared with $87.3 billion 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 limiting that deductibility, and lowering the standard corporate tax rate to 20% from 35%.
“With tax reform, these transactions are definitely becoming more attractive,” said Ajay Khorana, global head of Citigroup Inc.’s financial strategy and solutions group, which advises companies on these kinds of transactions. “Borrowers are trying to be proactive.”
John Demming, a spokesman for Philadelphia-based Comcast, declined to comment. Lori Anderson, a spokeswoman for St. Paul, Minnesota-based 3M, and Randy Hargrove, a spokesman for Bentonville, Arkansas-based Wal-Mart, didn’t respond to requests for comment.
The refinancings could have an effect on life insurers, pension plans, endowments and other companies with significant corporate bond holdings.
Details of any tax overhaul are still hazy. The framework for tax reform that Republicans released on Sept. 27 said only that interest deductions "will be partially limited," for example. Rep. Kevin Brady, chairman of the House Ways and Means Committee, said before the release of the proposal that 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.
Adding to uncertainty over how the final rules will look, Trump is looking to adjust the tax-overhaul framework. He grew angry after learning that the proposal to end a deduction for people in high-tax states could hurt some people in the middle class, according to two people familiar with his thinking.
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 Sen. Rand Paul of Kentucky and is feuding with Sen. Bob Corker, who has been a vocal critic of the White House and 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. Rep. Brady said on Wednesday that overhaul is still on track for this year.
Even with incomplete information about how new laws will look, companies have been positioning as best they can for any changes. The Republican plan to make it cheaper for companies to bring overseas profit back to the U.S. has spurred some corporations to favor short-term borrowing recently, strategists at Bank of America Corp. wrote in a report. When U.S. corporations bring cash from foreign countries back home, they expect to use at least some of it to pay off debt.
Gilead Sciences last month sold $3 billion of bonds to help finance an acquisition. All of the bonds it offered matured in two years or less, which is unusual for a bond offering that is funding a purchase. The company had more than $30 billion of cash abroad as of June 30, according to its filings. The Trump administration’s proposed tax on offshore profit would be in the 10% range, according to National Economic Council Director Gary Cohn.
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