Several topics came out of this week’s iTreasurer editorial meeting, including a look at how companies should explore the benefits of bank loans; the issues involving custodian banks and moving banks. Also, there is the issue of how US MNCs are no longer waiting for tax reform and reforming their own structures via prospective acquisition or repatriating off-shore cash in response to activist agitation.
Bank loans
Investments in the leveraged bank loan market can be an attractive sub-asset class, or alternative investment for corporate cash investors to diversify their fixed income portfolio, pick up yield, and reduce interest rate risk. And although a bit riskier, further diversification into the European leveraged loan market for some portion of a corporate’s allocation to this asset class is also worth consideration. We’ll take a look at what some companies are doing as well as a few of the hurdles companies encounter.
Custodian banks
As the seeming Rodney Dangerfield of banks, custodian banks “don’t get no respect.” That was pretty much the consensus of a recent NeuGroup Treasury Investment Managers’ Peer Group meeting. The overwhelming majority of members rated their custodians as only “good,” certainly not great, and with a lot of grousing. This is a surprise as custodian banks are such an essential component of a successful investment program.
Despite the “grass-is-always-greener” somewhere else opinion prevailing only one member in the group has conducted a search for a new custodian in the last five years. Many have felt that their current custodian was just good enough not to warrant the trouble and disruption of a search and a change. The TIMPG member who had taken action walked the group through their company’s custodial search and transition, which proved to be extremely successful.
Tax reform and inversion
Companies lately are taking matters into their own hands when it comes to tax reform. That is, they’re reforming in other countries where taxes are less onerous. This was recently highlighted by Pfizer’s recent bid for AstraZeneca, which included the possibility of reincorporating in the UK. This is called “inversion” and many companies are considering it to save considerable amount of taxes. Chiquita’s recent acquisition of Ireland’s Fyffes and plans to move to Ireland is another recent example. Last year it was Ommicom’s bid to acquire France’s Publicis.
Under Pfizer’s acquisition structure, according to one tax attorney, a AstraZeneca “would be placed on top of Pfizer, which will open up a whole array of additional tax planning opportunities” unavailable under a US company. Pfizer joins a number of other pharma companies inverting, including Valeant, which recently acquired Canada’s Allergan.
Taking their tax medicine … or not
Meanwhile, as speculation was growing that activist investors might pressure US MNCs to just take the tax hit and repatriate now, eBay announced its announced its repatriation of $9bn to the US for which it took a $3bn tax hit (it says the added cash will give it more financial flexibility to capitalize on opportunities as they arise in the US, including M&A). In contrast, Apple chose to continue with synthetic repatriation by following its blockbuster $17B debt issuance of last year with this week’s $12B debt deal to replenish its on-shore US cash being distributed via its ever rising buyback and dividend programs. Why eBay chose not to follow Apple into still receptive corporate debt markets is a question to ponder. Meanwhile, they have further emboldened activists to look past the tax consequences and pressure cash-rich US MNCs for different allocations of their off-shore cash. Along with the re-ascendant inversion trend and continuing synthetic repatriation, actual repatriation of off-shore cash (due to activist pressure or not) certainly raises the stakes on US tax reform discussions.