Apple, Microsoft Borrow Now Instead of Waiting for Tax Shiftby
Companies rely on debt sales for refinancing, buybacks
Issuers with cash needs ‘can’t bank on repatriation’ yet
This year, tax reform could give U.S. companies access to hundreds of billions of dollars they have stashed overseas. Many corporations can’t wait that long.
Apple Inc. and Microsoft Corp. combined sold $27 billion of debt this week to fund their daily operations, repay maturing debt, and buy back shares. Those bond sales might be unnecessary if new tax laws come this year, because under President Donald Trump’s proposed plan, companies could pay a one-time 10 percent levy to bring back money held overseas, less than a third of the current rate.
Apple Chief Executive Officer Tim Cook told investors this week that he was “confident” that “some sort of tax reform” would be coming this year. But until it goes into effect, borrowing is still the best bet for many companies, said Jordan Chalfin, an analyst at debt research firm CreditSights.
“They can’t bank on the repatriation until it actually happens,” Chalfin said. “For now, there’s a real need for cash.”
Take Microsoft. As of the end of 2016, it had some $25.1 billion of short-term debt known as commercial paper maturing by the end of September 2017, a number that swelled after its $26.2 billion purchase of LinkedIn Corp. It had just around $6.5 billion of cash in the U.S., according to company regulatory filings. Issuing corporate bonds will help it refinance some of those near-term obligations.
Apple has more stateside cash than Microsoft -- about $16 billion at the end of 2016 -- but it also has plans for returning another $49 billion to shareholders. Last quarter, Apple spent $15 billion on dividends and stock buybacks. The company has about $230 billion of overseas cash and marketable securities, much of which is invested in corporate bonds.
Whenever companies can bring back cash, corporate bond issuance will likely drop, by as much as $150 billion a year, Bank of America Corp. estimated in November. That’s equal to more than 10 percent of the U.S. investment-grade debt issued last year, according to data compiled by Bloomberg.
Outside of the financial sector, U.S. companies had about $1.77 trillion of cash overseas, according to Moody’s Investors Service’s analysis of borrowers it rates as of the end of the year. The companies with the most overseas cash tend to be in the technology and pharmaceutical industries.
It’s not clear how soon tax reform will come. A number of published analyst notes in recent days have raised questions about Trump’s ability to implement his promises in the time frame previously expected. Senior Congressional aides told Reuters that spring 2018 might be a more likely time frame for tax reform to be passed.
“While our base case remains that Republicans can execute a tax reform-driven fiscal stimulus on or around the third quarter of 2017, we concede that execution risks are rising,” Morgan Stanley’s chief U.S. economist Ellen Zentner and her team wrote in a note last month.
Paul Ryan, the Speaker of the House of Representatives, told Fox News on Thursday that Congress will take up tax reform in the spring, after dealing with the repeal and replacement of the Affordable Care Act. On Friday morning, President Trump tweeted that “health care and tax bills are being crafted NOW!”
If tax reform does happen this year, companies could be allowed to repatriate their overseas cash in 2017, according to Ed Mills, a financial policy analyst at FBR Capital Markets.
The U.S. last saw a tax holiday under a 2004 law. As part of that legislation, companies were allowed to bring back foreign earnings for one tax year at essentially a rate of 5.25 percent if they reinvested the funds in programs like worker hiring or capital investments. Although that holiday had a time frame of a single tax year, a program like the House Republicans’ could be implemented almost immediately, and last at least 10 years, Mills said.
For now, companies don’t mind heading back to the debt markets, considering the low yields and minimal volatility, said Dave Novosel, a bond analyst at research firm Gimme Credit.
“Markets are still pretty good. Why not take advantage of it?,” Novosel said. “A month from now, or two months from now, things might not be as good depending on what happens with Trump and Congress.”