What a recent research note by the rating agency says about tech firms’ off-shore cash.
Trapped cash is good for companies as it promotes sound cash management, or so says Moody’s.
A week after a prominent article in The New York Times chose to highlight with some degree of positivity cash-rich US corporates’ efforts to win another repatriation tax holiday (HIA 2.0) as means to stimulate a flagging American economic recovery, Moody’s Investors Service has come out with a note in favor of the status quo.
Focusing on the most cash-rich US tech companies, Moody’s analyst Richard Lane argues that restrictions on off-shore cash utilization are a positive from a rating perspective, since they encourage prudence. “The constraints on using overseas cash acts as a disciplinary force, limiting companies from paying huge dividends, engaging in large share buybacks, or making credit-weakening acquisitions,” the Moody’s analyst noted in “Technology Company Cash Cache Likely to Have Extended Overseas Vacation.”
Carrying a heavy bond-holders’ bias, Moody’s claims to be fine with cash continuing to build up off shore, so long as domestic cash is sufficient to cover debt payments. While off-shore cash reaching 90 percent like with Oracle, or Cisco at 89 percent, are a potential source of concern, these tech companies are not leveraged enough to run into trouble with the remaining 10 percent of their free cash flow. And in a pinch, they can still repatriate and pay the 35 percent tax, which is a far cry from default.
Off-shore cash as bond-holder reserve. In other words, Moody’s is characterizing offshore cash as a kind of special reserve fund for bond-holders. The bigger the reserve, the better—so long as a corporation’s debt levels don’t dwarf domestic cash generating capacity. Moody’s base-case scenario, is that the 21 cash-richest US tech firms’ overseas cash level could almost double (as it has since 2006) again to $238bn, or 79 percent of total cash, over the next three years. Domestic cash levels by comparison will remain relatively steady at $55-65bn.
Of course, Moody’s is also banking on large foreign acquisitions that utilize off-shore cash to remain the exception rather than the rule. Microsoft’s acquisition of Skype for $8.5bn using off-shore cash (which some felt led to it overpaying) is cited as an example that will not likely be followed by other US tech companies. Should more tech companies be tempted to use off-shore cash to buy sizeable non-US targets, they may eventually have to consider the rating impact. But apart from this, don’t count Moody’s as a supporter of HIA 2.0. Will shareholders beg to differ?