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Exclusive: Bond market eyes ways to cope with U.S. tax reform

By Natalie Harrison and Shankar Ramakrishnan

By Natalie Harrison and Shankar Ramakrishnan

NEW YORK (IFR) - US corporate bond market participants are discussing ways to structure new deals if US tax reform proposals, including the elimination of interest expense deductibility, are implemented, sources told IFR.

As the administration of President Donald Trump begins to focus on revamping the US tax law, market players are preparing for a variety of outcomes.

The process includes changing the language in new bond documents that would allow issuers the flexibility to deal with their debt.

One source said he was aware of at least one issuer that is preparing to sell a high-yield bond that would include a provision to buy the bonds back at a premium if interest expense deductibility is dropped.

It would be the first junk bond to include such a covenant since tax reform proposals were announced.

"The market is now preparing for potential changes in tax," the source said.

"Issuers want this because if companies' ability to deduct debt interest expenses from tax is eliminated, their tax bill would go up significantly."

One high-yield investor said a redemption covenant would be a logical step, but the issuer would still likely have to pay a premium.

In the high-grade market issuers and bankers are also discussing ways to deal with another proposal that deals with repatriation of cash held overseas by US companies, another market source said.

"There is a lot of dialogue around the tax reform proposals and a range of different ways are being discussed that include whether redemption should be optional or mandatory."

(Reporting by Natalie Harrison and Shankar Ramakrishna; Editing by Jack Doran)

 

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