Actionable Ideas for Companies and Sponsors
“Deemed Dividend” Tax Changes Enhance Financing & Liability Management Options for Stressed Companies
On October 31, 2018, the Internal Revenue Service and Treasury Department issued proposed regulations that in most circumstances eliminate the tax on “deemed dividends” (i.e. the transfer of foreign earnings back onshore). These includes transactions in which a foreign subsidiary invests in U.S. property, including not only via direct loans to a U.S. parent, but also certain types of credit support provided by a foreign subsidiary for the benefit of third party lenders to their U.S. parent – for example, via guarantees, pledges of more than 2/3 of the foreign subsidiary’s stock, or other collateral.
As a result, stressed or distressed borrowers may now be able to significantly enhance the credit quality of their borrowings by offering the guarantees of their foreign subsidiaries and/or a pledge of their foreign subsidiaries’ stock. For companies with significant foreign operations, these enhancements also may offer substantial incremental value to their creditors, either in the context of a new financing or a debt exchange, to improve its terms and enhance participation.