(Wall Street Journal - Blog) -- The era of U.S. companies hoarding cash offshore may be coming to an end as a result of the new U.S. tax law, a development that raises concerns about corporate credit risk for more indebted companies down the line, according to S&P Global Ratings.
Cash held overseas by U.S. nonfinancial companies rated by S&P rose an estimated 15% to a record $1.3 trillion in 2017 from a year earlier. The top five largest cash hoarders — Apple Inc., Microsoft Corp., Alphabet Inc., Cisco Systems Inc. and Oracle Corp. — together held $570.6 billion in foreign cash, or roughly 44% of the total, according to the report.
Total cash held by U.S. nonfinancial companies, including money parked domestically and overseas, rose 9% to a record $2.07 trillion, according to the report.
But the U.S. tax overhaul is set to trigger a reversal in the more than decade-long build-up of overseas cash holdings. The new tax code requires companies to pay a one-time 15.5% tax on all unrepatriated foreign profits held in cash, a reduction from the previous corporate tax rate of 35%. However, the one-time tax applies to all offshore cash, regardless whether the companies plan to repatriate it.
“The effective tax rate for overseas earnings has been cut significantly, which has encouraged companies to repatriate the ‘trapped’ cash,” said Andrew Chang, a credit analyst at S&P and an author of the report.
Apple said it would draw down its cash hoard over time, and has already reduced the cash balance by about $18 billion, partly through $23 billion in stock buybacks.
“It’s our expectations that not only will Apple pay out its cash in buybacks and dividends, it will also pay down and retire debt as it comes due,” Mr. Chang said. The technology company has around $120 billion in outstanding debt, he added.
Cisco Systems in February said it would bring home $67 billion of its foreign earnings, or virtually all of its offshore cash. The company has returned $16 billion to shareholders so far this year, a spokeswoman said in an email, roughly $11.6 billion in stock buybacks and around $4.4 billion in dividends. Cisco also spent $11 billion on retiring its short-term debt.
Representatives from Apple, Oracle and Alphabet did not immediately respond to emails requesting comment.
A representative from Microsoft declined to comment.
Other cash-rich companies are expected to follow suit and funnel more of their foreign cash toward repaying their debt, as well as returning it to shareholders, Mr. Chang said.
That could help reduce concerns about record-high debt levels. Debt among U.S. nonfinancial companies rose by about $500 billion to $6.3 trillion in 2017 from the prior year, though it’s not equally distributed. Investment grade companies, excluding the top 25 cash hoarders, hold roughly $5 dollars of debt to every $1 of cash. Junk-rated borrowers have $8 of debt for every $1 of cash, according to S&P.
“The credit market has been extremely accommodating over the past eight years,” Mr. Chang said, adding that many investment-grade companies have taken on massive debt loads to finance blockbuster acquisitions.
The high debt levels, alongside the expected decline in corporate cash balances, raises concerns about longer-term credit risks, Mr. Chang said.
“Credit risk would be magnified if the next economic downturn were to coincide with declining cash balances,” Mr. Chang said.
Source: Wall Street Journal