Some of the world’s biggest companies are readying their balance sheets for tax-law overhauls before a single bill has been introduced in Congress, trades that can net them millions of dollars in savings if rules are reworked.
Behemoths like Verizon Communications Inc. and Time Warner Inc. are buying back bonds they’ve issued, and selling new ones. These transactions can make sense even if tax laws don’t get refashioned, but at least part of the motivation for two deals over the last five months was to get ahead of possible tax law changes, according to people with knowledge of the deals.
More companies may look to do similar transactions in the coming months, one of the people said. Citigroup Inc.’s financial strategy and solutions group, which advises issuers on corporate finance, told clients in a note last week that they should consider steps including buying back debt at prices above face value before the rules are changed.
By buying back debt now that trades at prices above their maturity values, companies are essentially pre-paying interest, which they can deduct from their income while tax rates are still high. That will prove wise if tax rates end up falling, reducing the value of the deduction, or if the deduction ends altogether, both of which have been proposed by Republican lawmakers.
Rising Yields
Verizon last week sold $11 billion of bonds in part to position for possible tax law changes. It used a portion of the proceeds to buy back $3.1 billion of notes for about $3.9 billion, allowing it to eliminate some of its debt maturing next year in addition to longer-term bonds. Spokesman Bob Varettoni declined to comment.
Late last year, potential tax law overhauls helped spur Time Warner to pay investors about $3.9 billion, plus accrued interest, to buy back debt with a $3 billion face value. Time Warner spokesman Keith Cocozza said “tax reform was not a primary driver for the transaction” but that the deal was executed in a way that allows the company to benefit in case of tax law changes.
The deals often make sense even without any possible tax benefits because interest rates, and potentially longer-term bond yields, are rising. Buying back debt that matures in the next few years for example, and issuing new bonds maturing in say 10 years, makes sense for many companies looking to keep a lid on their interest expenses, if yields end up rising fast enough.
Time Warner’s Cocozza said the media and entertainment company came to market primarily to take advantage of their expectation for rising bond yields. Planning ahead poses little risk to companies even if overhaul plans fail or take longer than expected, said Ajay Khorana, global head of Citi’s financial strategy and solutions group.
“Under most circumstances, these actions are likely to have only limited downside risk if tax reform fails,” Khorana said.