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Fitch: US Tax Reform May Put Speculative Grade Issuers at Risk
May 1, 2017 / 1:31 PM / 7 months ago

Fitch: US Tax Reform May Put Speculative Grade Issuers at Risk

(The following statement was released by the rating agency) CHICAGO/NEW YORK, May 01 (Fitch) A significant cut in the U.S. corporate tax rate could pressure the corporate credit profiles of speculative grade issuers with large debt burdens and a high cost of debt should it be applied alongside an elimination of interest expense deductibility, according to Fitch Ratings. The Trump administration revealed its tax reform proposal last Wednesday, which included cutting the corporate tax rate to 15%. In contrast, the House Republican plan proposed a 20% corporate tax rate, although this is under a controversial destination-based cash-flow tax that faces opposition in the Senate and does not appear to have the support of the Trump administration. On its own, a reduced tax rate would benefit all corporate issuers, but it remains unclear if deductions, tax credits or other statutes that issuers currently employ would be removed, including the potential elimination of interest expense deductibility. The loss of the tax shield generated by interest expense would effectively make debt more costly. Taken in isolation, the elimination of interest expense deductibility would ultimately increase cash taxes paid. This is less of a concern for investment grade issuers, but could have a greater impact on speculative-grade issuers, especially those in the 'B' category and below. Rising interest rates will compound this negative cash flow impact. In the hypothetical example below, we illustrate the effects of tax reform on FFO for a typical 'B' credit at varying levels of leverage and cost of debt. Assuming the non-deductibility of interest expense and a reduction in the corporate tax rate to 15% from 35%, we find that the impact to cash flows becomes increasingly negative with greater levels of leverage and cost of debt. This analysis assumes a change in the tax rate and the loss of 100% interest expense deductibility (assumes no interest income), and all else equal. <iframe allowfullscreen src="//e.infogr.am/us_corp_tax_rate_reform_chart?src=embed" title="US Corp Tax Rate Reform Chart" width="550" height="505" scrolling="no" frameborder="0"> The Trump tax plan also neglects to mention the immediate deduction of capital expenditures, which could also have an impact on credit profiles. Final tax reform policy can take a significant number of permutations due to limited details and differing views. The ultimate impact on corporate credit profiles depends on how various changes offset each other. Contact: Hugo Sancen Head of U.S. Research Corporate Ratings +1 312 368-2096 Fitch Ratings 70 West Madison Street Chicago, IL Rolando Larrondo Group Credit Officer - North America +1 212 908-9189 33 Whitehall Street New York, NY Kellie Geressy-Nilsen Fitch Wire +1 212 908 9123 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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