The repatriation of foreign profits under the American Jobs Creation Act, also known as the Homeland Investment Act, is likely to result the repayment of debt thereby pushing credit spreads even tighter--in an already tight market. Roughly $324 billion after taxes stands to be repatriated, one half of which may be directed toward debt reduction, according to a survey conducted by J.P. Morgan.
"If a large portion of such funds are indeed earmarked for debt reduction, not only would corporate creditworthiness improve on the margin, but we also believe the technical imbalance between supply of and demand for corporate bonds could intensify, driving spreads tighter," said Edward Marrinan, head of North American high-grade strategy at Morgan in a note to investors. He remarked the repatriation had been delayed by Congress and the Treasury department's hammering out the provision's details, which now specify funds cannot be repatriated for executive compensation, dividend payments and share buybacks.
"It seems to us that companies benefiting from repatriations not only have the potential to retire a hefty amount of their existing debt, but also have no pressing need to issue new debt," Marrinan added. Companies with large un-repatriated profits include Pfizer, Exxon Mobil, IBM and General Electric.