Return to site

BIG TRENDS COULD BE HEADING UP THE CORPORATE DEBT WAY

by Leonardo Reos, FRM

· Bond Markets,Tax Policy

In all the chaos and dislocations in the markets following president Donald Trump ‘s rhetoric on his economic agenda, there’s one in particular that is catching my attention. And that is interesting given investors’ uncertainties and focus on the fiscal stimulus and tax reforms expected from the incoming US administration, and arguably built in risk assets. But more importantly, and hidden from the spotlight, the $8.5 trillion US corporate debt market may be headed to confront a seismic shift in the way investors position this asset class in the future and companies are lead to finance their investment projects in the US.

Interestingly enough, these fluctuations can also have an impact in the returns of the US credit asset class as a whole. This is because as part of the tax plan overhaul, foreign profit repatriation will become a central piece of legislation. Under the proposed republican led tax changes, US companies will no longer be taxed on foreign income but taxed on the imported goods into the US. This means companies will be able repatriate their future profits without a penalty and could eventually lead many firms to bring overseas cash to finance US acquisitions and onshore investments. In addition, those companies that keep uninvested profits offshore might be taxed at 8.75%, further incentivizing them to reduce their hoarding overseas. Finally, under the new tax proposal, net interest deductions would be eliminated or reduced, therefore weakening the attractiveness of debt financing relative to equity.

All these changes could at some point in the not so distant future, have a substantial impact on supply side of the corporate debt market, causing a drought and eventually a secular rally leading to tighter spreads. The latter could spark a flight of investors to riskier assets like the equity markets, and further push up their arguably already stretched valuations. Additionally, this could also open renewed opportunities for companies to issue debt financing.

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OK