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Potential Acquisition - Update
Quick find code: 294-295-346-65774421
It does not look bad at all in the eyes of shareholders if a company finances its operations through debt. First of all, it's cheaper to borrow capital than to save and consume your own. Also, by borrowing, company ceases an opportunity to grow faster than the ones who utilize its savings only. Of course, the more company borrows, the higher the risk of default, and in order to compensate the risk, the higher the interest. Sufficient ratio has to be established to meet the risk level expectations and bearable interest expense.
Secondly, the acquiring company does not have to borrow from independent parties. They can borrow the required funds from associated parties and inter-company financing is very common. Whereas the interest rate would have to be at the 'arm's length' and it would have to be documented accordingly to the local tax/transfer pricing regulations, once again, it does not signal anything bad. I expect that the acquisition is financed through inter-company loan/line of credit. And ability to borrow signals that the lenders trust borrower's ability to repay the loan. That's definitely a good signal
As claiming tax losses on interest.. Considering that it most likely is a loan from a related parties - not all interest expense is deductible from CIT. Currently OECD is developing and many other non-OECD countries planning to adopt BEPS plan. Action 4 is going to set a threshold of 30% on Net interest/EBITDA ratio or 1 mEUR whichever is higher. Interest exceeding this ratio could not be included into deductible expenses. Also, there're various thin capitalization regulations which restrain deduction of interest expense.
Last, but not least, as a result of excessive monetary supply, various asset purchase/quantitative easing programmes, interest rates have been very low for quite a while
It's great time to borrow now.
And $300 m. is not really a huge sum to borrow and is in the range of typical corporate bond.
Secondly, the acquiring company does not have to borrow from independent parties. They can borrow the required funds from associated parties and inter-company financing is very common. Whereas the interest rate would have to be at the 'arm's length' and it would have to be documented accordingly to the local tax/transfer pricing regulations, once again, it does not signal anything bad. I expect that the acquisition is financed through inter-company loan/line of credit. And ability to borrow signals that the lenders trust borrower's ability to repay the loan. That's definitely a good signal
As claiming tax losses on interest.. Considering that it most likely is a loan from a related parties - not all interest expense is deductible from CIT. Currently OECD is developing and many other non-OECD countries planning to adopt BEPS plan. Action 4 is going to set a threshold of 30% on Net interest/EBITDA ratio or 1 mEUR whichever is higher. Interest exceeding this ratio could not be included into deductible expenses. Also, there're various thin capitalization regulations which restrain deduction of interest expense.
Last, but not least, as a result of excessive monetary supply, various asset purchase/quantitative easing programmes, interest rates have been very low for quite a while
It's great time to borrow now.
And $300 m. is not really a huge sum to borrow and is in the range of typical corporate bond.
18-Apr-2016 18:48:56
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