For investors in cash-rich tech stocks like Apple (AAPL) , Microsoft (MSFT) , Cisco (CSCO) , Alphabet (GOOGL) and Oracle (ORCL) , talk of a tax break on offshore cash conjures visions of vast stock buybacks and dividend payouts.
Those five tech companies alone have more than half a trillion dollars stashed overseas, according to S&P Global. All together, corporate American might repatriate $1 trillion over a number of years if the government slashes the tax rate for bringing overseas cash back to the U.S. as part of a larger tax reform package, S&P Global forecast in a recent report.
While equity investors look towards overseas tax reform with optimism, pushed the stocks of many of these companies higher, debt holders who have lent heavily to fund tech's corporate needs while cash was stuck outside the country may view a tax holiday with some trepidation. "Debt investors are looking at it the other way," said S&P Global analyst Andrew Chang of the talk of buybacks and dividends. "Is this going to hurt me?"
Through a process that Chang describes as "synthetic cash repatriation," companies in tech and other sectors raised debt over the last few years to pay for buybacks, dividends and other needs, instead of drawing on their overseas funds and getting taxed on them. The cash provided debt investors with kind of safety net, however, even if creditors don't have a legal claim on the funds. "It wasn't collateral as much as a cushion, a nice thing to have," Chang said.
Take Apple, for instance. The iPhone maker's balance sheet went from zero debt to $97 billion in debt over the last five years. "The first question [credit investors] ask is now can Apple bring back $230 billion in cash and can they use all of that for buybacks?"
A group of 25 companies comprising tech giants like Apple and Microsoft but also Ford (F) , General Motors (GM) , Pfizer (PFE) and Dow Chemiccal (DOW) has about $1 trillion in overseas cash. S&P Global estimates that this group could bring home more than $700 billion over a number of years, accounting for 75% of the total cash repatriated.