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Cash & Working Capital

Repatriation: Careful What You Wish For

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February 17, 2017

Credit: cash repatriation could negatively impact ratings.

BenjaminsRepublican plans to lower taxes on US multinationals’ overseas cash might at first glance appear positive for corporates’ credit standing, but in fact it could be problematic. However, the overall the impact is unlikely to be significant.

S&P Global Ratings estimates that US nonfinancial companies hold $1.84 billion trillion in cash and investments at the end of 2015, with 60% or $1.1 trillion of that offshore. The rating agency says in a February 13, report titled “What Impact Could Cash Repatriation Have on US Corporate Credit Quality,” that repatriation under a “moderate” tax rate scenario—President Trump has mentioned 10% compared a House plan proposing 8.75%--could result in an inflow of up to $1 trillion.

There are still many unresolved issues regarding such a repatriation, such that the issue is unlikely to become clearer until mid-year, S&P says, but comprehensive corporate tax reform including a lower tax rate and repatriation will likely be priorities for the Trump administration. That’s in part because they tax revenues could help fund Trump’s campaign promise of infrastructure repair, and because “supranational” tax authorities are pressuring countries to normalize corporate tax rules.

Repatriation is important to investors, S&P says, because nonfinancial corporates’ bond issuance has grown by 23% over the past four years and now averages more than $600 billion a year, while issuance of the 25 largest rated cash holders has more than tripled, to $150 billion. Much of this debt has been accrued in “synthetic cash repatriation” schemes, in which investors purchase the debt relying in part on trapped overseas cash to support it.

“The thought of this safety net disappearing through shareholder returns, leaving only debt on borrower’s balance sheets, naturally may concern debt investors,” S&P says.

S&P believes that cash repatriation would result in substantial share-repurchases that would have an immediately negative credit impact if they hadn’t already been factored into the agency’s long-term credit analysis of the company’s credit. However, those share repurchases would likely take multiple quarters or years, muting the impact.

Dividend hikes and one-time special dividends would also likely increase, although the former at a modest pace, and most issuers will likely allocate some portion of what they view as excess cash to either retire debt, meet upcoming maturities, or possibly fund pension obligations. In addition, issuers may become more open to large acquisitions. However, S&P expects no meaningful change in capital expenditures and research and development, given those are planned years in advance, although spending on those could shift modestly to the US over the long term.
Since many companies would likely determine that they held much of their cash overseas due to tax restraints, they would likely conclude they no longer needed to maintain so much cash.

“In all, we see a decline in net cash balances as excess liquidity is returned to shareholders, and with it, rising leverage for some and reduced cushion for others,” S&P says, adding that the top 1% of issuers controlling more than half of total cash would be unlikely to see meaningful rating actions. “These companies would still have no adjusted leverage, but the depletion of cash would reduce their headroom against ratings and limit their capacity to make debt-funded acquisitions or withstand operating hiccups.”

Among the rest, and especially those on the border between investment-grade and noninvestment-grade, S&P “can envision a small number of downgrades” for companies that have a limited rating cushion “but opt to use the repatriated cash for share repurchases, thus raising their leverage …”

More speculative-grade companies hold just 15% of total cash, and S&P assumes a much smaller portion of cash overseas, given their smaller operational scale and lower non-US sales. Consequently, the rating agency anticipates minimal ratings impact on those firms.

“Aside from select BB-rated technology and health care borrowers, we don’t expect speculative-trade companies to repatriate much cash,” S&P says.

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