HOUSE_OVERSIGHT_023086.jpg
1.8 MB
Extraction Summary
2
People
5
Organizations
0
Locations
0
Events
2
Relationships
3
Quotes
Document Information
Type:
Financial research report
File Size:
1.8 MB
Summary
This document is page 18 of a Bank of America Merrill Lynch 'Equity Strategy Focus Point' report dated January 29, 2017. It analyzes the potential economic impact of ending interest deductibility on various market sectors (Energy, Telecom, etc.) and discusses how levered companies might react to tax changes. While the document contains no direct mention of Jeffrey Epstein, the Bates stamp 'HOUSE_OVERSIGHT_023086' indicates it was produced during the House Oversight Committee's investigation, likely regarding banking compliance or suspicious activity reports.
People (2)
| Name | Role | Context |
|---|---|---|
| Hans Mikkelsen | Investment Grade Strategist |
Cited regarding the potential reduction in demand for IG credit.
|
| Michael Contopoulos | High Yield strategist |
Cited regarding the potential dampening of Leverage Buyout (LBO) activity.
|
Organizations (5)
| Name | Type | Context |
|---|---|---|
| Bank of America Merrill Lynch | ||
| House Oversight Committee |
Document bears the Bates stamp HOUSE_OVERSIGHT_023086, indicating it was produced as part of a congressional investig...
|
|
| FactSet | ||
| S&P | ||
| Preqin |
Source for data on LBO funds' cash holdings.
|
Relationships (2)
Referred to as 'our Investment Grade Strategist' within a BofAML report.
Referred to as 'our High Yield strategist' within a BofAML report.
Key Quotes (3)
"Companies will likely grow comfortable with a smaller amount of debt, retain more earnings, use less cash for dividends and share buybacks"Source
HOUSE_OVERSIGHT_023086.jpg
Quote #1
"The tax change could also dampen Leverage Buyout (LBO) activity... where these funds are already struggling to generate high returns"Source
HOUSE_OVERSIGHT_023086.jpg
Quote #2
"LBO funds are currently sitting on close to $1tn in cash looking for a home"Source
HOUSE_OVERSIGHT_023086.jpg
Quote #3
Full Extracted Text
Complete text extracted from the document (2,989 characters)
Chart 19: Sector EPS impact from ending interest deductibility (15% rate; ex- fin, utes)
-8% -6% -4% -2% 0%
Energy -6.2%
Telecom -5.9%
Materials -3.5%
Discretionary -3.1%
Industrials -2.7%
Real Estate -2.8%
Staples -2.2%
Health Care -1.7%
Info Tech -0.9%
■ 15% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
-8% -6% -4% -2% 0%
Energy -6.2%
Telecom -5.9%
Materials -3.5%
Discretionary -3.1%
Industrials -2.7%
Real Estate -2.8%
Staples -2.2%
Health Care -1.7%
Info Tech -0.9%
■ 15% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
Chart 20: Sector EPS impact from ending interest deductibility (20% rate; ex- fin, utes)
-12% -10% -8% -6% -4% -2% 0%
Energy -8.2%
Telecom -7.9%
Materials -4.7%
Discretionary -4.1%
Industrials -3.5%
Real Estate -3.4%
Staples -2.9%
Health Care -2.3%
Info Tech -1.1%
■ 20% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
-12% -10% -8% -6% -4% -2% 0%
Energy -8.2%
Telecom -7.9%
Materials -4.7%
Discretionary -4.1%
Industrials -3.5%
Real Estate -3.4%
Staples -2.9%
Health Care -2.3%
Info Tech -1.1%
■ 20% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
Chart 21: Sector EPS impact from ending interest deductibility (25% rate; ex- fin, utes)
-15% -10% -5% 0%
Energy -10.2%
Telecom -9.6%
Materials -5.7%
Discretionary -5.1%
Industrials -4.3%
Real Estate -3.8%
Staples -3.6%
Health Care -2.7%
Info Tech -1.3%
■ 25% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
-15% -10% -5% 0%
Energy -10.2%
Telecom -9.6%
Materials -5.7%
Discretionary -5.1%
Industrials -4.3%
Real Estate -3.8%
Staples -3.6%
Health Care -2.7%
Info Tech -1.3%
■ 25% tax rate
Source: BofAML US Equity & Quant Strategy, FactSet, S&P
How will levered companies react?
Companies will likely grow comfortable with a smaller amount of debt, retain more earnings, use less cash for dividends and share buybacks, and potentially draw down cash if they have it. If a tax holiday is also granted, that might offset the loss of benefit. Companies that regularly issue long-term debt may choose to reduce that burden to offset the tax change, and find those funds elsewhere. We find it unlikely that the change would result in a surge in equity issuance, unless the change applies to existing debt, which is unlikely in our view. While this change should be taken as a line item in a wholistic bill, there are victims and beneficiaries here. Corporations that have high leverage ratios, low retained earnings, high interest expense to earnings ratios, no cash overseas offset from repatriation, and those that have recurring long-term debt needs may be most at risk.
Companies will likely grow comfortable with a smaller amount of debt, retain more earnings, use less cash for dividends and share buybacks, and potentially draw down cash if they have it. If a tax holiday is also granted, that might offset the loss of benefit. Companies that regularly issue long-term debt may choose to reduce that burden to offset the tax change, and find those funds elsewhere. We find it unlikely that the change would result in a surge in equity issuance, unless the change applies to existing debt, which is unlikely in our view. While this change should be taken as a line item in a wholistic bill, there are victims and beneficiaries here. Corporations that have high leverage ratios, low retained earnings, high interest expense to earnings ratios, no cash overseas offset from repatriation, and those that have recurring long-term debt needs may be most at risk.
Other implications
While some argue that companies will try to raise outsized amounts of investment grade capital ahead of the deadline to lock in funding with the tax benefit before the loophole is closed, there is a reasonable chance that a provision is included in the legislation that would treat such debt as new debt. In our Investment Grade Strategist Hans Mikkelsen's view, demand for IG credit could be materially reduced over time. The tax change could also dampen Leverage Buyout (LBO) activity, according to our High Yield strategist Michael Contopoulos, where these funds are already struggling to generate high returns – note that LBO funds are currently sitting on close to $1tn in cash looking for a home, according to Preqin's third quarter update.
While some argue that companies will try to raise outsized amounts of investment grade capital ahead of the deadline to lock in funding with the tax benefit before the loophole is closed, there is a reasonable chance that a provision is included in the legislation that would treat such debt as new debt. In our Investment Grade Strategist Hans Mikkelsen's view, demand for IG credit could be materially reduced over time. The tax change could also dampen Leverage Buyout (LBO) activity, according to our High Yield strategist Michael Contopoulos, where these funds are already struggling to generate high returns – note that LBO funds are currently sitting on close to $1tn in cash looking for a home, according to Preqin's third quarter update.
Who could be hurt: See Table 21 for a screen of stocks with high net interest expense as a percentage of net income which could potentially be hurt most by an end to the deductibility of interest expense.
18 Equity Strategy Focus Point | 29 January 2017
Bank of America Merrill Lynch
HOUSE_OVERSIGHT_023086
Bank of America Merrill Lynch
HOUSE_OVERSIGHT_023086
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