This page has been archived and commenting is disabled.
Why Massive Offshore Cash Parking Means Companies Have Access To Only A Fraction Of The Record Cash Stash
Yesterday's Microsoft issuance of $4.75 billion in new debt, of which the 3 Year maturity portion priced at the lowest yield ever for a corporate bond of 0.875%, came at the pristine, and much discredited AAA rating. Yet what this little experiment revealed, in addition to confirming that the corporate bond bubble has never been greater, is that the cash on the sidelines argument used by every single permabull on CNBC is sorely lacking in some factual details. Namely, that a dollar at home is worth more than a dollar abroad, as BofA's Hans Mikkelsen puts it succinctly. Let's back up for a second: the primary reason why investors are funneling their capital in droves in tech and other companies that have key foreign operations is precisely due to the fact that while their domestic subsidiaries may be expiring, it is the foreign subs that are generating the bulk of the revenue, profit and thus, cash. Yet what very few have considered, is that repatriating his cash to the good old USA would cost companies hundreds of billions in US corporate taxes. That's right: even though companies are taxed abroad, the issue of double taxation is resolved by subtracting foreign taxes paid from the US tax liability. However, because foreign corporate taxes are typically lower there is an adverse tax consequence associated with remittance to the parent company. In other words, of the $1.2 or however many trillions in total corporate cash on balance sheets, a good 30% chunk of this belongs to Uncle Sam if these companies wish to use it for domestic IRR purposes. And yes, just so there is no confusion: using foreign cash to pay dividends or share repurchases is considered repatriation from the perspective of US tax regulations. Enter Microsoft: most of its cash resides abroad and is essentially useless for dividend purposes, unless the company wishes to see its net cash position cut substantially upon repatriation. Yet with everyone now clamoring for increased dividends and stock buybacks, the company is forced to access domestic capital markets and use that money for shareholder friendly activities. This is a capital mismatch fiasco just waiting to happen. The only possible winner out of this - Uncle Sam, who may soon order foreign cash to be repatriated over corporate pleas otherwise.
The companies most at risk by this geographic split in the value of dollars are ironically precisely the same tech companies that everyone is in love with. Bank of America explains why:
As we have highlighted, US corporations have built up significant cash holdings over many years - and in particular since the outbreak of the financial crisis. By the end of 2Q this year non-financial companies in the S&P 500 held $1tr in cashlike assets, an increase of nearly $200bn from the end of 2008. Clearly a high proportion of that cash is held by the Technology sector (36%) while Health Care holds 19% and Consumer Discretionary 14%. The increase in cash assets since 2008 is slightly more evenly distributed, as the Technology sector accounted for 33%, Industrials 28%, Consumer Discretionary 16% and Industrials (ex. GE) 15%. Lack of disclosure makes it difficult to judge the overall proportion of cash held in foreign subsidiaries (presumably less than one third), but the Technology sector is the extreme case as for example Cisco has disclosed that of $40bn in cash, $33bn, or 83% is held in foreign subsidiaries. While from a net debt perspective there is no difference between funding shareholder friendly activity with cash or new issuance, it is clear to us the presence of cash in foreign subsidiaries leads to more issuance than would otherwise be necessary, as highlighted by today’s Microsoft deal.
Our advice to all those who like blind lemmings follow the advice and chase the "cash hoard" - think, and do your homework first. If indeed over a third of the record cash holdings are foreign, they are as good as useless to shareholders. Which means that in order to be shareholder friendly, a company will need to be creditor adverse, and increase its default risk by increasing debt capital raises. Which only means that once the rate environment flips and rates rise, all the heretofore AAA and other IG companies, will suddenly be punched in the stomach as ever more capital starts flowing out in the form of interest expense. Remember - just like CDOs, today's AAA-rated deal is tomorrow toxic debt.
NetNet - buy CDS in IG/XO companies with lots of foreign cash and hedge DV01 with CDS in those companies with domestic cash, preferrably at same level. Then sit back and wait for the divergence.
»
- 11218 reads
- Printer-friendly version
- Send to friend
- advertisements -
How much of MSFT's cash is held abroad?
From BofA: "Now in the case of Microsoft this is not a credit event as the company has more than $36bn in cash-like assets on its balance sheet. The reason why the company still had to issue is that most of that cash resides in foreign subsidiaries."
O RLY?
Ya RLY!!
No wa!!!
Hmmm... a few weeks ago I read a story in the Telegraph that companies have real difficulties getting profits out of China and other Far East countries. Is that what's going on here?
Well, there goes a good chunk of Whitney Tilson's thesis on MSFT... LOL
I don't know about MSFT, but overseas manufacturing is generally associated with "tax holidays" in the overseas locations . . . so it's not surprising that the bulk of cash is located in these overseas locations.
Subs with cash. Forget about getting at same. The parents creditors are structurally subordinated to the creditors if the subs.
So the parent debt issuance is riskier than it appears from a corporate-wide balance sheet standpoint? Do these tech companies (e.g., MSFT) universally route their international sales through foreign-domeciled subs? Just trying to get a complete handle on this.
Yes, but also they route domestic sales through offshore hubs. Essentially, any product manufactured overseas will need to be sold to a domestic sub at a fair price (i.e. transfer pricing rules, transaction must be at arms length.) In fact, they often sell to an offshore hold co (Cayman, Bermuda etc so usually zero tax) at as low a price as possible, then charge the domestic entity as much as they can in order to minimize domestic tax rate. It should be obvious when you see the split in tax revenues between corp (has been around 10% but now lower) and individual (90%) that the multinationals are very aggressive when it comes to minimizing their tax bills...
It makes the accounts look good from a free cash flow basis, but obviously
Would this materially affect the trade deficit number? If companies are understating the price of things that they sell to overseas subs, and overstating prices when they buy, that should appear in the deficit measures. And if they cumulatively have hundreds of billions in overseas cash, it seems like that would constitute a small but measurable portion of the monthly deficit.
Shows how Washington is slowly rotting America from the inside out...
Washington state or Washington D.C.?
Moin from Germany,
i´m waiting for another attempt to get another tax break to "invest & create jobs"....
The latest attempt was a "smashing" success... ;-)
Flashback 2005....
It was called the “Homeland Investment Act,” and was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs. It gave international companies a large one-time tax break on overseas profits, but only if the money was used for specified investments in the United States.
The law specifically said the money could not be used to raise dividends or to repurchase shares.
Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries.
About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.
There is no evidence that companies that took advantage of the tax break — which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate — used the money as Congress expected.
http://immobilienblasen.blogspot.com/2010/07/clevelend-fed-one-measure-of-corporate.html
Took a look at the link. Thank you for posting that. Are some corporations not due for some jail time? Sure looks like it. But since most of the money went to shareholders I guess that would make for some reluctant investigators.
It's all criminal law...without the prosecutors
I posted this on another thread and off topic but has anyone tried to SELL any ETF on BofA/Merrill online trading platform? You can only BUY online and no SELLing allowed on any ETF...was told won't be fixed until April 2011.
If there's no selling allowed, I didn't get the memo...
If you are a RIA, then its TradePMR for you, my friend. Other than that for individuals, consider that TDAmeritrade has a back door for trading after hours and Schwab has a very good platform.
~Misstrial
Makes sense... Foreign Exchange, bitches. Gotta pump up the comprehensive income somehow. And soon they'll start buying Gold.
The only possible winner out of this - Uncle Sam, who may soon order foreign cash to be repatriated over corporate pleas otherwise.
When pigs fly. Corporations don't pay taxes they levy them.
i hear the story of the scorpion and frog over and over again. what no one talks about is what my buddies use to do in Iraq when they were "down range." Put two scorpions in a bottle and see who "the winner was." It was the same everytime--they would sting and sting and sting and sting and sting--and at the end they both would be dead. There is no answer for what results by putting both New York and DC "in the bottle." They think there's "something important because it's fearsome" going on and "when people feel a need to leave" that's when "you win." Well..."congratulations New York. Congratulations DC." Now "in other news...."
Are there IRS regulations against borrowing from their own subsidiaries abroad?
If no, the bonds-for-divs theory stinks somewhat.
Forcing corporations to bring the cash back here could not happen soon enough. But as soon as someone mentions it a stampede ofthousand wingtips of the ex congressmen turn lobbyist will hit the street running. Hence the main flaw in our system that needs to be changed if we are ever going to fix this broken system. OUTLAW LOBBYIST. Only one huge problem. You depend on the same sorry assed corrupt SOBS to stop the very thing that is lining their freaking pocket and campaign coffers. Without some sort of revolt America seem truly phucked.
All well and good, I'd like to see 'em banned as well. What do we do about that pesky Constitution and our right to petition, etc.
I wonder what the correlations are between subrev flows and asset/hedging strategies. Must be a decent book at Cisco.
Financials already show US taxes on unremitted subsidiary earnings (net of creditable non-US taxes allocable to such amounts) as a deferred tax liability. MS merely wisely further deferred the "repat tax," by borrowing to pay the dividend. In addtion, since MS' after-tax ROE far exceeds the interest rate (deductible) on the borrowing, they are just taking advantage of the debt bubble, by arbing the two. Do you think the syndicate lenders on that deal did not price in the after tax value of their implied collateral? And yes, securing the debt with the foreign sub's stock constitutes a deemed dividend for US tax purposes. No big smoking gun here, other than smart IBs working for MS.
Woops, that kind of answered my question - except I wonder why Microsoft didn't go longer-term on that debt and define their interest costs farther out. Maybe that's next?
Not much different than the consumer regarding walking the edge of the cliff. Prospects of deleveraging are growing slimmer each day - and if rate environment flips, the deflationary winds will pick up big time. Can't imagine that TPTB don't know this. As such I suspect that everything possible will be done to keep rates low for as long as possible. Corporations in this case would be in the same boat as consumers. A tangled web is weaved. The unraveling will be epic.
Lots of pros I know are short big and are desperately hanging on to losing positions.
This guy is an example.
http://www.tigeruniversity.com/mp3/PTH092210.mp3
I'd prefer to go with the flow, rather than fight it.
Especially with moves like this occurring.
Robo... Good God man.
....all gone mad. Why ? Why not ?
lol, Robo is pissing off the natives. Funny stuff.
How about a hot chick instead of Paulson?
Of course they always planed on getting the money....
Way too much market manipulation by the Fed and CBs to be doing shorts right now, imo.
Thse guys are going to lose their shirts.
~Misstrial
Debt in Dollars
Revenue and Profits in FX
Growth coming from non-American subs
Extra profit
...simple business
It is access to this kind of information that makes me LOVE ZH... that and our great cast of characters too numerous to list individually. :)
Is this really news? Doesn't everyone realize this is the number one reason why all of the tech behemoths are so reluctant to initiated/increase their dividends with their cash stockpiles....
Excellent article.
One question, though, if this is the case, why didn't Microsoft issue 10- or even 20-year bonds. Wouldn't that define their interest rate expense on moving the cash from foreign subs to domestic shareholders?
Point is, I don't exactly see how these issuances are going to be in trouble as long as there is lots of cash collateral to back them - no matter where it is. Worst case, they route the claim on collateral through their bankers. Lots of ways to avoid the tax man in today's synthetic world, no?
Is there something I'm not seeing here?
The question is just how much of the cash collateral is truly there. One wonders when S&P and Moody's will start considering geographic cash distribution as part of their corporate credit assessments.
Think about your 401k. Which is worth more: $10,000 pretax or post tax?
Part of the endless arrogance of governments is that they never consider the simple fact that corporations and people can just leave. There are places on this planet with topless beaches, beautiful chicks who actually like men, who want to please a man, instead of the vain, asexual heifers one usually encounters..., wait a minute. Why is my ass still here?
Hmmmmmm, let's see. If the US gubimint stepped up and even partially taxed foreign subsidiaries at let's say 15 %, the unlimited outsourcing and this money on the wrong side of the fence issue would go away. Ohh I'm sorry, that is a solution to the problem. I will go back to working for the Man in our future surfdom.
Just goes to show, that for every problem there is a solution that is simple, easy, and wrong.
I wonder what Microsoft earns on its foreign deposits. I bet more than the 7/8 of a percent that it pays to borrow in the US.
The guys talking up "cash on the sidelines" also tend to include time deposits.
Stocks without dividends....yeah baby! I will probably NEVER own an equity again until dividends > 5%
Jobs are going where the cash resides, away from USA. "Great American Companies" like AAPL make all their stuff abroad and export to US. In other words, US money printing covers the huge and decades long trade deficit for the purpose of keeping big US companies afloat. It's a game that works until it collapses, like credit card pyramiding (I pay x with card y which I pay with card z...).
But there's a darker aspect, a fundamental weakness that threatens stability: as more US jobs get offshored weekly (another 450K every week and climbing), US buying power is diminished, threatening the business model of selling finished products to US consumers from offshore. In response to the jobs hemorrhage the Fed will print more and further devalue the dollar, diminishing purchasing power even more, forcing companies to further cut costs.
It's a perfect biflationary vicious cycle. Jobs, incomes and personal net worth deflate while cost of inputs for business and cost of living inflates as the system feeds global demand for raw materials and raises the cost of imports. It puts upward pressure on US taxes. Biflation, bitchez!
reading the posts on this thread, subj of off shore money and production schemes and avoiding corp taxation..all reinforce my belief thatAmerica should be aggressively increasing tariffs..even though many on ZH think that is un-thinkable rube protectionist knee jerkism,.
with depression written all over it, I would disagree.
For those with an open mind who can connect some dots posted here..tariff policy has been used to destroy the US economy. This thread on MS is more data to support that view.
It really gets better. The best deal is to transfer and hold the intellectual property in the offshore entity. Then make a royalty transfer payment to offshore with no additional cost actually incurred. Who knows what a particular software application will be worth when it is being developed?
Actually, if anyone had the capability of carrying it out, that would be the best tax avoidance scheme out there. Buy some long term value IP and transfer to your own offshore company to collect the royalties. Suppose Michael Jackson had done that with the ownership of the Beatles tunes royalties? Maybe he did.
In the evening ceremony chanel bags,chanel handbags sale as the first high-level chanel designer handbags custom Chinese star chanel bags prices uk XuQing alone in Paris – 2010 Shanghai chanel bags online uk,chanel bags uk online shopping early series dress coach outlet as ceremony. coach outlet store is Karl Lagrange coach outlet online the anfield fantasy coach outlet 2010 is 30-40 in Shanghai outlet 2010 coach handbags,coach handbags oulet China’s amorous feelings chanel 2.55 handbags,chanel handbags black different dress.
i hear the story of the scorpion and frog over and over again. what no one talks about is what my buddies use to do in Iraq when they were "down range." Put two scorpions in a bottle and see who "the winner was." It was the same everytime--they would sting and sting and sting and sting and sting--and at the end they both would be dead. There is no answer for what results by putting both New York and DC "in the bottle." They think there's "something important because it's fearsome" going on and "when people feel a need to leave" that's when "you win." Well..."congratulations New York. Congratulations DC." Now "in other news...."
carrera watch|646-223|E20-340|tiffany necklaces