After five years of rapid growth in corporate bond issuance, technology companies are expected to issue less debt in 2018 as they start to bring cash parked overseas back to the U.S.
That’s according to CreditSights analysts in a new report that forecasts that companies, including Apple Inc
, Broadcom Ltd.
and Microsoft Corp.
, will stop the practice off issuing bonds to raise the funds for shareholder rewards and repatriate foreign earnings instead.
That “synthetic repatriation” has caused the investment-grade tech sector to grow much faster than the broader market to approach $500 billion in face value at the end of 2017, according to CreditSights.
Companies opted to raise debt domestically, rather than pay the 35% tax rate that overseas cash was subjected to under the former tax regime. The tax bill signed into law by President Donald Trump in December has changed the math, even though the repatriation rate is higher than previously expected at 15.5% for cash and 8% for illiquid securities.
“We expect IG tech issuance to be down year-over-year for the first time in about eight years,” analysts led by Jordan Chalfin wrote in the report. “Simply put, the large tech credits can use repatriated cash for shareholders returns and/or domestic acquisitions.”
and Apple squeezed in bond deals in November, just ahead of the passage of the tax-code redo, in what Chalfin called “a last hurrah.” There was zero tech issuance in December and only a few deals in January — Jabil Inc.
and Tencent Holdings Ltd.
— that were refinancings, a trend that is expected to continue as the tech debt market matures.
Apple was the biggest tech issuer in 2017, selling $30 billion of dollar-denominated debt, driven entirely by its massive shareholder returns program, which includes dividends and stock buybacks. CreditSights is expecting the iPhone maker to refinance the $6.5 billion of bonds that are maturing this year.
The research firm is expecting the big tech companies to refinance an aggregate $22 billion of debt that matures in 2018, including $3.45 billion for Microsoft, $2.5 billion for Oracle, $4.75 billion for Cisco Inc.
and $4.6 billion for IBM Corp.
“We think most of these credits are comfortable with their gross leverage, and they can reduce it with EBITDA growth and/or repaying commercial paper borrowings,” said the report. “However, it’s possible that one or more of these credits won’t come to market this year, instead opting to reduce gross leverage by repaying upcoming maturities.”
Issuance could rebound, however, if some of the megadeals that are currently in uncertain shape were to happen, said CreditSights. These include Qualcomm Inc.’ s
effort to buy NXP Semiconductors NV
, which has been approved by the companies’ boards but awaits shareholder and regulatory approval in some regions.
That deal has been complicated by Broadcom’s unsolicited bid for Qualcomm, which has been squarely rejected. “We estimate the potential variability from these three companies could be as much as $40 billion next year,” said the report.
The repatriation tax will have a bigger impact on some credits than others, said the report, highlighting that Dell Technologies Inc.
has $79.2 billion in basis differences, mostly due to undistributed book earnings at foreign subsidiaries, said the report. The term basis difference refers to the difference between the financial reporting amount of an asset or liability and its tax basis, which is based on different tax laws and jurisdictions.
That would imply a roughly $6 billion tax bill, according to CreditSights. However, Dell said on its most recent earnings call that the calculation is not appropriate, as there are many variables.
Another impact of repatriation is that many companies hold their overseas cash in the form of Treasurys and corporate bonds. Liquidating those instruments would have a negative effect on the overall corporate bond market, especially for A-rated paper, said the report.
Apple’s most active bonds, the 3.000% notes that mature in November 2027, were trading at 98.456 cents on the dollar Tuesday to yield 3.184%, according to MarketAxess, or at a yield spread of 64 basis points over Treasurys.
On the equity side, Apple shares were up 0.3%, and have gained 49% in the last 12 months, while the Dow Jones Industrial Average
has gained 31% and the S&P 500
has gained 23%.