Legislation that is working its way through Congress could spur billions of dollars in high-grade issuance by blue chip U.S. companies with substantial foreign earnings. The Homeland Investment Act would provide U.S. companies with a one-time window to repatriate overseas profits at a tax rate of 5.25% (rather than 35%) and could drive companies to sell tens of billions of dollars of new high-grade issuance, said Krishna Memani, managing director and global group head of credit strategy at Credit Suisse First Boston. He explained multinational companies would have to do extensive fundraising because, while they have accumulated billions of dollars in foreign profits, only some of these foreign earnings are currently held in cash. Proceeds from the bonds would act as a proxy for actual overseas profits to repatriate to their U.S. parents.
Martin Gonzalez, principal in high-grade product development at Banc of America Securities, said that if the act is passed it could result in $100-200 billion of new issuance. Officials at dealer firms said the tax incentives are great enough that companies would fundraise to move cash from overseas subsidiaries back to the U.S.
Gonzalez predicted the bulk of the issuance will take place in Europe and said the legislation could have a negative impact on short-term European spreads. "When [companies] monetize their holdings, short-term spreads abroad will widen. But a large amount of the cash brought back will likely be used for debt repurchasing, which would drive yields down in the short-term markets in the U.S.," he explained. And Memani questioned whether the market will be able to absorb a technical shock. "Depending on how long the window is, we could have a situation where everyone tried to front-run everyone else, which technically is not good for the market. Spreads would widen if this issuance materializes," he noted.
John Burger, portfolio manager at Merrill Lynch Investment Management, said any volume increase will come at the front of the curve. "We expect [the legislation] to create a meaningful spike in issuance, but that it will be geared toward the short end. The risk lies in issuance of three years and less."
The sectors thought to be most incentivized are technology, consumer products, pharmaceuticals and energy, according to buy- and sell-side professionals. One official said potential issuers include Pfizer, which has $38 billion of unrepatriated foreign earnings, andExxon Mobil, with $22 billion of offshore. Lee Raymond, chairman and ceo of Exxon Mobil, and David Shedlarz, executive v.p. and cfo of Pfizer, did not return calls by press time.
Both the House and the Senate have approved the act, but each has employed different repatriation provisions which still need to be reconciled in conference in order for the HIA to be enacted, which Memani expects will happen after the presidential election. Gonzalez said the act has become a political issue because of high European tariffs and said its enactment is likely toward the end of the year or by next spring.
