As many U.S. corporates sit in a tight holding pattern waiting for further details on potential tax reform, other large players in the technology industry are preemptively taking action based on predicted features of the plan. Both the House Blueprint and Trump plan have targeted the interest expense deduction by either the outright disallowance of a deduction for net interest expense (House) or by providing for an election of either the interest deduction or immediate expensing of capital expenditures (Trump). One of the great unknowns in the final rules is whether pre-existing debt will be shielded from this expected limitation.
Bloomberg recently reported that Verizon Communications, lacking any apparent need for cash, went out and raised $9 billion in a debt offering and was reportedly driven by the idea that “grandfathered” debt may be protected from the new interest deductibility rules. Other tech giants also appear to be following suit with higher than usual bond activity. However, it is not entirely certain what is driving the activity. Is it speculation on grandfathering, speculation on rising interest rates or maybe a combination of the two? Microsoft kicked of the year with a $17 billion offering in late January followed by a $10 billion issuance from Apple shortly thereafter. Apple is, of course, sitting on a mountain of cash overseas and may be taking advantage of low interest rates while postponing any repatriation until other items on the reform agenda are settled (see: Unrepatriated Earnings as a Revenue Source: Lessons Learned from the AJCA).
So what might be driving this hypothesis on grandfathered debt? We have recently seen some form of “grandfathering” under the Foreign Account Tax Compliance Act (FATCA) and the new Section 385 regulations. And who could forget the grandfathering of home mortgages back in the late ’80s? While lawmakers have appeared to demonstrate some leniency and compassion toward debt issued prior to debt-related legislation, there have been no recent signs or even stirrings of a commitment to grandfather in this case. With the border adjustment tax (BAT) being described by one Republican senator as on “life support,” backers of substantial tax reform may be hard-pressed to find significant revenue raising measures to support a cut in the corporate tax rate down to 15 percent or 20 percent. Could pre-existing debt be up for grabs?
Author: Kenneth Dettman
We’d love to get your thoughts: How detrimental would it be for your company if there are no grandfathering provisions? How might your company adjust its capital structure in the absence of interest deductions? Please call or aliguori [at] alvarezandmarsal.com (email us) and let us know!