Verizon Leads Dash to Issue Debt

Corporate bond sales surge amid expectations Trump's tax plan will eliminate deductibility of interest payments.

It doesn't need the cash, but Verizon Communications recently issued almost $9 billion of new debt, and it's not alone. It looks as if companies are trying to lock in the current advantageous structure for making debt payments before a new, less-favorable tax proposal is adopted.

While President Donald Trump hasn't yet released the details of his "phenomenal" tax plan, analysts and investors widely expect that U.S. companies will no longer receive a tax benefit from interest payments paid on their debt. This belief is strong enough that it's helping to fuel a record pace of investment-grade bond sales this year.

The rush is being driven by a view among some on Wall Street that any debt in place before the reform passes will be deductible until it matures — a protective feature known as "grandfathering." Verizon appears to be setting itself up to make the most of this potential grace period.

Verizon won't be the last company to attempt to immunize its balance sheet from tax changes. It makes sense for corporations to both push out maturities and even store up a war chest for general purposes or future acquisitions that may only be pipe dreams so far. 

In fact, there's little to discourage companies from selling debt now. Investors can't get enough of it, and borrowing costs have actually declined this year even as speculation mounts that the Federal Reserve could raise interest rates as soon as next month. 

If the expected tax changes come to fruition, so-called grandfathering of existing debt will be nice for top-rated companies. But it will be crucial for the most-leveraged borrowers because the removal of the interest deduction could actually tip some of these companies into bankruptcy. Going forward, these junk-rated companies have to hope that the decline in the overall corporate tax rate is enough to offset the damage to their profits that such change could cause. 

In the meantime, the potential tax reform makes new debt issuance or exchanges a no-brainer. The question now is what companies will do with the proceeds that they don't need. M&A bankers will surely be on hand with some ideas.

 

Bloomberg News

 

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