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.