Trump Tax Plan Seen Shrinking Company Bond Sales by $150 BillionBy
Apple, Oracle among biggest issuers of debt backing buybacks
Leading cash hoarders have sold $136 billion of bonds in 2016
Trump has said he’d temporarily slash the tax rate on funds repatriated to the U.S. by American companies to 10 percent from 35 percent, meaning cash-rich companies that according to Bank of America Corp. stash an estimated $860 billion to $1 trillion abroad may no longer need to turn to the bond market as a cheaper alternative to finance share repurchases.
The impact would be substantial. Apple has become the biggest non-financial corporate-bond issuer in the world as it raised more than $80 billion in just four years to finance share buybacks instead of repatriating the more than $200 billion of cash it holds overseas. Oracle sold $14 billion of bonds in June to partly support shareholders. Bank of America expects that if taxes on overseas cash held by American companies are reduced, bond sales will go down by $150 billion each year.
“A topic of discussion post the Trump victory is the repatriation of cash and what that does to some of the large tech companies that would refinance or raise money in our market,” said Todd Mahoney, head of fixed-income syndicate for the Americas at UBS Group AG. “That could be a driver of reduced volume.”
Technology and health care companies -- holders of about 80 percent of all overseas cash -- have sold $136 billion of bonds this year for purposes other than acquisitions, according to data complied by Bloomberg. Apple has issued almost $24 billion of bonds this year in the U.S. largely to buy back equity. Despite its reliance on the bond market, Apple is sitting on a mountain of funds. Its overseas cash pile is more than eight times larger than the amount of bonds it sold this year, company filings show.
After the last tax holiday was passed in 2004, non-financial investment-grade bond sales plunged by about 30 percent, according to UBS strategists. Now, though, that market is almost three times larger, according to Bloomberg Barclays index data.
So long as investors are still clamoring for company debt as issuance falls, a smaller supply year may mean yields above Treasuries that are already near the lowest in a year may tighten even further. But not all bond investors are convinced.
“The market is a lot bigger than it used to be,” said Tom Murphy, a money manager at Columbia Threadneedle Investments in Minneapolis. “If more supply equals wider spreads, spreads should be at infinity.”
The clearest winners in a post-Trump bond market are probably chief financial officers such as Kelly Kramer of Cisco Systems Inc. The world’s largest maker of networking equipment has issued about $13 billion of bonds this year in part to boost shareholders.
“We’re encouraged that something will happen,” Kramer said on a call to discuss earnings on Nov. 16. The company keeps more than $57 billion of its cash abroad, according to regulatory filings.
“We have many, many scenarios of what we would do when repatriation comes,” Kramer said. “We recognize it’ll certainly give us a lot more flexibility.”