How do you think the tax cuts will affect highly leveraged cash generative companies? My initial thought is that without the higher tax shield there is more of an incentive to pay down debt. But a friend of mine disagrees and thinks that with lower tax rates companies will take on more debt to achieve the same level of tax shielding. Now I’m confused.
Although I don’t have visibility on what companies have actually been doing over the past couple of months, most research I’ve read agrees with your assessment; lower deductibility of interest cost means there is less incentive to raise capital through debt. Your friend’s logic doesn’t seem to make sense outside of some special cases. If you could no longer deduct mortgage interest and prices were the same, would you get a larger or smaller mortgage?
It’s hard to isolate the effects of the tax policy alone on borrowing, since short term interest rates have risen so much over the past few months. Let’s say the tax change makes borrowing for leveraged REITs or something more expensive by 0.15%. It’s a pretty small effect if overall financing is up by 0.50% to 0.75%.
corporate bond managers (Loomis, PineBridge) i’ve spoken to lately state that issuance is drying up and that they expect issuance to be very weak for the year.
I was recently speaking with the Treasurer at the company I’m with, and he said that this is not advantageous to companies who are highly levered. It only benefits companies with low leverage. Additionally, it has allowed us to improve our cost of capital by 200 bps in our largest business segement.
did no one see the cvs deal
^ issuance by an underlevered company for a strategic takeover still makes sense. otherwise, doesn’t make as much sense as a year ago. the cost of debt capital just went up.
cvs was already levered to begin with. they levered up even more with this deal and overpaid for it. this is their biggest acquisition by far, and they are known for serial acquisitions, but this may be too much for them to handle imo. i dont mind cos who do bolt on acqs that are relatively small to their size, but their aet acqu was overprice and almost equivalent in enterprise value. not even considering the operating risks invovled with their estimates due to synergies.
as for corporate debt and lack of deduction. this is deinfitely an ncentive for people to delever, whether people do so is another story. there are many reasons for companies to take in debt right now. rates are still pretty much below average. the long term is pretty much equivalent to the short term. and their higher cash flows could enable them to take on more debt.
lulz esrx just got acquired!!! 96 bucks per share deal. currently trading at $82. so a 17% discount. even at 96 this shit is low key cheap. bid it up bid it up bid it up!