The recent tax changes in the will benefit most US automotive parts suppliers, Moody's Investors Service says in a new report.
"Most US auto parts suppliers that we rate will be better off following the recent US tax overhaul," says Moody's Analyst Inna Bodeck. "Many suppliers have modest leverage and high capital spending needs, characteristics that are advantageous under the new tax law."
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Moody's says that the newly imposed interest deductibility cap of 30% of EBITDA will likely affect 16 of the 37 auto suppliers it rates. However, only eight of those 16 are at risk of being worse off, due to the reduced corporate tax rate and the ability to immediately write off 100% of capital spending through 2022.
The change in the calculation of the cap on interest deductibility, from 30% of EBITDA to 30% of EBIT in 2022, will not meaningfully reduce the proportion of suppliers that are better off under the new tax law, adds Bodeck.
Additionally, the opening up of foreign earnings streams via the shift to a territorial tax system will provide auto parts suppliers greater global financial flexibility, because they will generally have access to future foreign profits and cash flows without the burden of US taxes.
"We suspect that US auto suppliers will continue to reinvest a significant portion of foreign earnings in those local markets, while some high yield suppliers will be able to use the repatriated cash to pay down debt and use it for investment opportunities," says Harold Steiner, one of the authors of Moody's report.
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By GlobalDataLarge Baa and Ba-rated suppliers to original equipment manufacturer (OEM) are the biggest winners of the new tax law, notes Moody's, given their modest leverage profiles, capital intensive nature and high effective tax rates. These include BorgWarner Inc., Lear Corporation, LKQ Corporation, Tenneco Inc., Goodyear Tire and Rubber Company, Visteon Corporation, Cooper Tire and Rubber Company, and Dana Holding Corporation.
