ETF Trends
ETF Trends

By SNW Asset Management via

The primary intent of the proposed tax reform legislation, as we understand it, is to stimulate the economy and increase jobs.

We are not sure legislators also intend to make the world safer for corporate bondholders, but that is the way we see tax regulation playing out over the next few years. We see a number of ways a lower proposed corporate tax rate will help bondholders, some obvious and others far less so.

First, and most obvious, it is estimated that earnings per share (EPS) of the S&P could go up around 5% due to reform after you take into account lower taxes, interest deductibility, cash repatriation impacts and the effects of stock buybacks. We anticipate that most of the increase in earnings and repatriated funds will go into buybacks and higher dividends, yet it is easy to see that if a company is making more money its ability to service and repay its debts is enhanced.

Second, capping interest deductibility as a percent of EBIT or EBITDA should immediately encourage lower leverage levels in mergers and acquisitions, leverage buyouts and in the lowest tier of high yield issuers. Curbing some of these excesses can certainly help reduce corporate defaults over time, as well as loan losses in the banking sector, when the credit cycle turns.

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