Saturday, February 17, 2018

Corporate cash hoards invested in bonds

Rana Foroohar points to a just released Credit Suisse study by Zoltan Pozsar which documented the massive off-shore corporate savings of US S&P 500 firms invested in high yielding corporate bonds. She describes them as being as influential on the bond markets as some of the investment banks. Of the $1 trillion savings of about 150 firms, 80% belong to the largest and most intellectual property rich 10% of firms. 

The savings of the 150 firms shows that IT and pharmaceuticals dominate, with the top 10 names controlling over $600 bn of the off-shore savings, with Apple alone having a trove of over $200 bn!
The next figure shows how the total savings (offshore plus onshore, though 90% are held offshore) of the top 10 have evolved over time in terms of categories of investments.  
Observe the striking coincidence with the global financial crisis, as savings ballooned from just over $100 bn in 2008 to over $700 bn by end-2016. 

Highlighting the relevance of IT companies with their ability to shift profits across borders through IP, Pozsar writes,
Corporations that rely on booking revenues derived from intellectual property (IP) assets in tax havens are more efficient at shielding earnings from the IRS than firms that don’t (IP assets range from the integration of design and hardware into a phone to the formulas of blockbuster drugs). This explains the greater concentration of savings in the first segment. Compared to the first segment, the second segment of the universe is less reliant on IP assets – there ain’t no “killer” apps, brands, codes, designs or formulas in the auto, energy, industrial and medical equipment manufacturing sectors. The strategy to book revenues generated by a portfolio of IP assets in tax havens is not easy to apply in these industries.
The paper has several interesting graphics. There are two graphs which show how the corporate's holdings of US Treasury bond and agency debt as well as corporate bonds, ABS, RMBS etc compare very favourably with those of the largest investment banks.

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