Onshore cash pools the legacy of Trump tax reform, report treasurers

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18 months after the Trump administration’s tax reform, the trillion dollar reduction in US corporate cash piles is tailing off. But companies are increasingly managing their cash pools from the US, according to treasurers.

by Julian Lewis

Updated: September 25, 2019

As last year’s surge in repatriations subsides, US treasurers are starting to manage surplus cash from their international subsidiaries and other entities through cash pools based in the US. One instance is the software firm Citrix, where tax reform “changed the trajectory of a few things we were working on” Bruce Edlund, Senior Director, Assistant Treasurer, said at the Strategic International Treasury conference in Miami.

The Tax Cuts and Jobs Act drove a significant increase in cash repatriation last year – up to $777 billion, from 2017’s $155 billion. The December 2017 act slashed tax rates on repatriated profits to 15.5% on cash and equivalent holdings and 8% on illiquid instruments.

The effect peaked in H1 18, with Q1 19 the weakest since the new legislation, according to US Bureau of Economic Analysis data. Even so, US companies have now brought almost $1 trillion of earnings back onshore.

Much of this has been returned to shareholders subsequently via buybacks, special dividends and other distributions. But a significant volume has yet to be paid out.

Net cash balances at non-financial S&P 500 companies (including those that accepted what one treasurer terms the “gift” of tax reform) still stood at $908 billion in April, Bloomberg data shows. This compares to $977 billion in 2017.

Onshore pooling

Citrix, which currently has $1.6 billion of cash and cash equivalents, had already prepared to repatriate some of the cash it held outside the US a couple of years earlier, when it had a total of $2.5-3 billion globally including offshore cash, according to Edlund.  “We were in a situation where we already had the offshore cash in place up the chain and ready to move back to the US,” Edlund said.

Moreover, all of the company’s offshore cash was already held in US dollars. As a result, “it was relatively simple for us to pull the trigger very quickly after tax reform,” he noted.

Bruce Edlund, Senior Director, Assistant Treasurer, Citrix, US

Indeed, Citrix made its first repatriation in December 2017 immediately after the change. It moved the remainder last year. “That worked out well for us,” Edlund said.

Citrix used repatriated cash to help fund the $2 billion share buyback it had announced just one month before tax reform. It had initially issued $1.5 billion of new debt against the offshore cash to finance the buyback, but tax reform freed it to not issue more.

Continuing surplus

Besides repatriated offshore cash not used for paying debt down, companies like Citrix now face the challenge of managing continuing cash surpluses from their foreign subsidiaries.

“We’re still working on the best, most efficient way of getting this on-going cash flow back,” Edlund said. The company would like more frequent access to it than the annual distribution allowed by some jurisdictions.

Before tax reform, the company ran an international cash pool from the Netherlands. “Countries that had trapped cash would sign an agreement, put their money in and we would invest it to earn some extra income.”

After December 2017 it moved this arrangement onshore too. “So now we’ve got countries putting their excess cash in the cash pool and we’re becoming more like a bank,” Edlund said.

“We’re creating statements for the countries that are in the cash pooling agreement that say ‘this is what you have on deposit, here’s your interest that you’re earning and thank you very much but we might be using that cash’.”

No US participation

However, Citrix’s US operation is not a participant in the pool since it does not generate excess cash (it recently paid off a $1.4 billion convertible bond, for example). It is also unclear if US regulators would approve.

Bankers and treasurers report significant interest among other US companies in this issue. They are unaware of any having yet succeeded in this type of integration.

Like many, Citrix is also working on other ways of concentrating its cash. These include ‘pay on behalf of’ schemes (though it has yet to launch these) and inter-company loans.

 


 

Hear more from Citrix at EuroFinance International Treasury Management