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Cash Left Untaxed Aided by $103 Billion in Bonds: Credit Markets

May 29, 2013

Cash Left Untaxed Aided by $103 Billion in Bonds

Apple, which issued a record $17 billion of bonds on April 30, leads borrowers from Microsoft Corp. to Nike Inc. paying an average of 2.38 percent annually to borrow for about 12 years. Photographer: David Paul Morris/Bloomberg

U.S. businesses with the most cash are holding more than $425 billion overseas as they tap the bond market to help sidestep a corporate tax rate that Apple Inc. (AAPL:US)’s Tim Cook says handicaps American competitiveness.

Among the 100 non-financial companies with the most cash and marketable securities, 31 that disclose funds parked in foreign units have sold $103 billion of dollar-denominated bonds since the start of 2012, according to data compiled by Bloomberg. Cupertino, California-based Apple, which issued a record $17 billion of bonds on April 30, leads borrowers from Microsoft Corp. (MSFT:US) to Nike Inc. (NKE:US) paying an average of 2.38 percent annually to borrow for about 12 years.

Raising domestic funds with debt instead of repatriating non-U.S. holdings allows companies to exploit both record-low yields and tax-deductible interest payments while also avoiding a government levy of as much as 35 percent on the cash. Washington’s tax code has failed to keep up with the digital age by making it too costly to bring money home, Cook said last week in congressional testimony. Of the iPhone maker’s $145 billion of cash, 70 percent is held overseas.

Boost Leverage

“There’s this giant arbitrage game going on,” Edward Kleinbard, a tax law professor at the University of Southern California, said in a telephone interview from Los Angeles. By issuing dollar debt, “firms are leaving their worldwide interest expense in the United States, where they’re deducting that interest against their highest-taxed income in the world, and getting cash to fund dividends or stock buybacks,” he said.

Global demand for information-technology multinationals has left the businesses with at least $340 billion abroad, the most of any industry, Bloomberg data show. The companies have issued about $40 billion of bonds since the beginning of last year.

Conditions are ripe for technology borrowers to boost leverage to fuel equity returns that have underperformed the broader market, Barclays Plc analysts including Danish Agboatwala wrote in a May 16 report. Microsoft, Intel Corp. and Cisco Systems Inc. will likely continue to use debt offerings to “synthetically” unlock foreign cash.

“It’s a no-brainer,” John Lonski, chief economist for Moody’s Capital Markets Research Group in New York, said in a telephone interview. “Cash may be overseas, but through the credit market it can be put to work, at least for the benefit of shareholders.”

Pfizer Sale

Elsewhere in credit markets, Pfizer Inc. (PFE:US) issued $4 billion of securities in its first dollar-denominated debt sale in more than four years. Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates rose to the highest in 13 months. Valeant Pharmaceuticals International Inc. obtained as much as $7.2 billion of debt financing for its purchase of Bausch & Lomb Holdings Inc.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose to the highest level since March, climbing 3.2 basis points to 18.2 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

The Markit CDX North American Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, fell 0.6 basis point to a mid-price of 75.5 basis points, according to prices compiled by Bloomberg.

European iTraxx

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose three to 98 at 1:15 p.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan added one to 107.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Fairfield, Connecticut-based General Electric Co. (GE:US) were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3.7 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Fannie Mae

The four-part offering by Pfizer, the world’s largest drugmaker, included $1 billion of 3 percent, 10-year debt paying a yield of 87.5 basis points more than similar-maturity Treasuries, Bloomberg data show. New York-based Pfizer last sold dollar-denominated bonds in March 2009, issuing $13.5 billion of securities in five parts.

Fannie Mae’s current-coupon 30-year securities climbed 0.09 percentage point to 2.91 percent, the highest since April 2012, Bloomberg data show. The yields have risen from a record-low of 1.68 percent reached Sept. 26, after the Federal Reserve announced it would start buying $40 billion of government-backed housing debt a month, embarking on its third round of so-called quantitative easing to spur growth.

Yields on mortgage-bonds are rising after Fed Chairman Ben S. Bernanke told lawmakers last week that the pace of purchases could be reduced if the economy shows sustained improvement, sparking concern that values of the debt will fall as the central bank pulls back from the market.

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index fell 0.05 cent to 98.64 cents on the dollar, the lowest since May 3. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has gained 3.14 percent this year.

Valeant Financing

Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

Valeant got financing of $6.7 billion to $7.2 billion from Goldman Sachs Group Inc. to help fund its $4.5 billion purchase of Bausch & Lomb and will spend $4.2 billion to repay the eye-care company’s debt, according to a joint company statement.

In emerging markets, relative yields widened 5 basis points to 298 basis points, or 2.98 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure has climbed from 275 on May 10, the least in almost three months.

Of 100 U.S. non-financial companies with more than $1.1 trillion of cash and marketable securities, at least 45 disclose overseas holdings in regulatory filings, Bloomberg data show. Those companies keep more than 65 percent of their $654 billion of total cash outside the country, with 31 of them issuing dollar-denominated bonds since the start of 2012.

‘Efficient Leverage’

Under the U.S. tax code, companies pay foreign taxes on income earned outside the U.S. If they bring back the money, they must pay the full U.S. tax rate of 35 percent after taking credits for foreign taxes paid.

Apple alone skirted as much as $9.2 billion in taxes by borrowing rather than repatriating funds, Gerald Granovsky, an analyst at Moody’s, estimated this month. Because interest payments are tax-deductible, Apple saves about another $100 million a year, he said.

“We pay all the taxes we owe -- every single dollar,” Cook, Apple’s chief executive officer since 2011, said in testimony on May 21 to the Senate Permanent Subcommittee on Investigations in response to accusations the company had created a web of offshore entities to avoid paying U.S. taxes.

Adding debt to Apple’s capital structure will help with “efficient leverage of our very strong balance sheet,” Apple Chief Financial Officer Peter Oppenheimer said on an April 23 conference call with investors.

‘Take Comfort’

Steve Dowling, an Apple spokesman, declined additional comment.

The 31 U.S. corporate borrowers are paying less than governments from Brazil to South Korea to raise funds in the bond market with interest expenses than can be deducted against domestic income.

More than $57.5 billion of their debt sold since the start of 2012 was issued to mature in 10 years or more and has an average coupon of 3.36 percent, Bloomberg data show. That compares with the 4.74 percent yield as of yesterday on similar-maturity bonds for investment-grade companies in the U.S., according to Bank of America Merrill Lynch index data.

“To issue debt is very cost-effective for them,” Wesley Sparks, head of U.S. fixed income at Schroder Investment Management North America Inc., which manages about $25 billion of the assets, said in a telephone interview. “We can take comfort in that, if worst comes to worst, and at some future point there’s a recession and they needed to tap the cash, they could bring it home.”

Microsoft, Cisco

Microsoft, which sold $1.95 billion of dollar bonds in April after a $2.25 billion offering five months earlier, ranks second to Apple with $74.5 billion of cash on March 31, $66 billion of which was held in foreign subsidiaries, according to an April 18 regulatory filing.

Cisco, which last sold new debt in 2011, keeps more than 80 percent of its $47.4 billion stockpile overseas, according to its filing. Nike, with 72 percent of its $4 billion in cash held in foreign subsidiaries, last month entered the bond market for the first time in a decade with a $1 billion offering. Intel, which borrowed $6 billion in December, doesn’t disclose foreign holdings.

“Given the historically low interest-rate environment that prevails today, we view the prudent use of debt as a cost effective and efficient tool in our long-term capital deployment strategy,” Mary Remuzzi of Nike said in an e-mail.

Share Repurchases

Intel raised funds in December to “take advantage of historically low interest rates,” said Chris Kraeuter, spokesman for the Santa Clara, California-based chipmaker. “Our capital allocation philosophy seeks to balance ongoing capital expenditures, growth investments and direct return of capital to shareholders through share repurchases and dividends.”

Peter Wootton, a spokesman for Redmond, Washington-based Microsoft, and Kristin Carvell of Cisco declined to comment.

Offering documents for each bond sale cited share repurchases as a potential use of proceeds. Apple’s unprecedented borrowings will help finance a $100 billion capital reward for equity owners.

“Companies can do almost anything with their offshore, lightly taxed earnings, except use them for dividends or stock buybacks,” Kleinbard said.

Repeal Wager

While companies with multinational operations have lobbied for years to lower corporate tax rates in exchange for bringing some of their offshore cash home, the push to rewrite tax laws has cooled as the pace of deficit growth slows and lawmakers work to revise immigration law.

The U.S. captured just 9 percent of its federal tax revenues from companies in 2010, down from 32 percent in 1952, according to a 2011 Congressional Research Service report. The Fed’s plan to aid an economic recovery by purchasing assets and suppressing interest rates has only made borrowing a more attractive option for companies with offshore cash.

“The real risk is when it comes to refinancing all this new debt, three or five or seven or 10 years from now, in an environment where the yield curve will in all probability be higher,” said Alan Shepard, an analyst and money manager at Madison Investment Advisors Inc., which oversees about $16 billion in Madison, Wisconsin. “Obviously, the board rooms are betting on the repatriation tax being repealed or strongly curtailed by then so they can then get the cash back to reduce leverage.”

The following is a table of cash held overseas by U.S. companies and bonds issued since the beginning of 2012, using data compiled by Bloomberg:

Company Name        Overseas Cash       Bonds Issued
In billions of dollars

Apple Inc.               $102.3               $17
Microsoft Corp.          $66                  $4.2
Cisco Systems Inc.       $39.5                $0
Google Inc.              $31.1                $0
Oracle Corp.             $27.4                $5
Qualcomm Inc.            $19.3                $0
Coca-Cola Co.            $15.2                $5.25
Merck & Co.              $12.8*               $9
Hewlett-Packard Co.      $11.3**              $2
Medtronic Inc.           $10.99               $4.08
EBay Inc.                $8                   $3

*Merck figure based on 80 percent of the company’s $16 billion
in cash. The company says generally 80 percent to 90 percent of
its cash and investments are held by foreign units.

**Hewlett-Packard’s figure based on estimate of 90 percent of
the company’s $12.6 billion of cash. The company says
“substantially all” of its cash balances are outside the U.S.

To contact the reporter on this story: Charles Mead in New York at

To contact the editor responsible for this story: Alan Goldstein at

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