LQDB - The Inflation Reduction Act Likely Won't Hurt Corporate Bonds
Summary
- The Inflation Reduction Act (IRA) will direct $739 billion toward various clean energy and healthcare initiatives over the next decade.
- The corporate alternative minimum tax requires companies of a minimum size to pay a cash tax rate of at least 15%.
- We expect the IRA to have a small negative financial impact on investment-grade corporates, though not enough to change our near-term view or positioning within the sector.
By Zachary Schroeder
The law’s modest tax provisions won’t weigh too heavily on high-grade issuers.
The Inflation Reduction Act (IRA) will direct $739 billion toward various clean energy and healthcare initiatives over the next decade. While corporations will pick up a good chunk of the tab—via a new alternative minimum tax ((AMT)) and an excise tax on stock buybacks—we do not believe these new provisions will have a material impact on investment-grade issuers.
The corporate AMT—the larger of the two provisions, expected to raise $222 billion over ten years—requires companies of a minimum size to pay a cash tax rate of at least 15%. But for many issuers, several carveouts may end up reducing that rate.
For example, deductions for accelerated depreciation and spectrum amortization will help the utility and telecom industries. Also, net operating losses—starting from 2020—will be allowed to offset income. And certain credits for clean-energy investments, research and development, and foreign income will lower the bill, too. True, companies now paying a cash tax rate less than 15% might pay a bit more—but not much.
The stock-buyback provision calls for a 1% excise tax on net share repurchases beginning in 2023 and is expected to generate $74 billion in revenue over ten years. Companies buying back the most shares hail from the TMT, financial and healthcare sectors; they also tend to have healthy free cash flow and sizable cash balances, easing the buyback tax’s relative burden.
Take Apple ( AAPL ), which buys back more of its own shares than any company in the broad index. In 2021, the 1% excise tax would have cost the company just $844 million—more than manageable considering Apple generated $93 billion in free cash flow and had $191 billion in cash.
The buyback tax could cause companies to pull forward share repurchases and potential issuance into 2022, but we expect those impacts to be modest.
Looking at the big picture, and taking into account the market’s healthy (though peaked) credit fundamentals, we expect the IRA to have a small negative financial impact on investment-grade corporates, though not enough to change our near-term view or positioning within the sector.
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The Inflation Reduction Act Likely Won't Hurt Corporate Bonds