The pending Homeland Investment Act, which would allow companies to repatriate off-shore profits at a reduced tax rate, could spark a chain of events that would result in Moody's Investors Service lowering its ratings on high-grade issuers in the pharmaceutical sector, the rating agency said in a report last week. One banker at a bulge-bracket firm said the report is noteworthy and was ruffling feathers on the origination desk last week.
Michael Levesque, v.p. and senior analyst at Moody's in New York, said companies that repatriate assets for certain reasons if the act becomes law could face rating agency action. "If the off-shore funds are accessed for reasons other than debt reduction, such as for shareholder dividends and litigation expenses, their repatriation could lower the credit quality of the parent company," he explained. Levesque said companies such as Schering-Plough (Baa1), Bristol-Myers Squibb (A1) and Wyeth (Baa1) are examples of issuers with high U.S. cash needs and large accumulated foreign earnings who would be most at risk for downgrades. The severity of downgrade risk would vary on a case-by-case basis. Levesque added that if companies issue debt from foreign subsidiaries, the new issues could make existing debt subordinate. Sell-side officials are predicting that the act could lead to billions of dollars of high-grade issuance (BW, 8/9).
