NEW YORK--(BUSINESS WIRE)--The US government's latest major corporate-tax proposal would likely result in reductions of the foreign cash balances held by US multinationals, according to Fitch Ratings. We believe the proposal lacks incentive for companies to keep cash overseas and could therefore result in a repatriation of funds back to the US. Such cash redeployment would likely go toward acquisitions and shareholder returns.
Fitch would not expect material rating changes following such a repatriation, as our ratings emphasize gross leverage metrics. In addition, ratings for most issuers that maintain materially large cash balances overseas include some expectation that the cash would be used for M&A or shareholder returns. Cash deployment in excess of expected levels in these areas could lead to rating actions.
Last week, the Wall Street Journal reported that key lawmakers are attempting, once again, an overhaul regarding the taxing of multinational businesses. The proposal is meant to reduce the current and future buildup of cash overseas while limiting the financial incentive for companies to relocate businesses overseas.
The most recent suggestion for corporate-tax overhaul, should it be enacted, would be mostly neutral to credit profiles. A tax rate on foreign earnings via the latest round of talks hasn't been specified, but earlier this year President Obama proposed a one-time 14% tax on profits earned and held abroad, with a 19% rate suggested for future foreign earnings.
For investment grade and most high yield issuers, liquidity shouldn't be an issue. However, given the size of incremental tax payments relative to foreign cash balances, changes could be negative for some credit profiles.
Certain issuers have been able to reduce foreign cash balances through foreign investments or through tax planning mechanisms (such as moving intellectual property overseas and charging back the domestic parent). For these issuers, there may not be sufficient cash overseas to fund the proposed tax on existing undistributed foreign earnings. Foreign tax credits may help, if they haven't already been used. This could lead to additional borrowings if cash generated from operations are already earmarked for other purposes (cap ex, dividends or share repurchases).
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.