Changes to Canadian income trust rules aren’t likely to have immediate credit impacts, says Moody’s Investors Services.
The rating agency says that it believes the announcement is credit neutral for most existing trusts and is potentially a modest credit positive for BCE Inc. and Telus Corp.
“Moody’s has considered the basic income trust structure to be a moderate credit negative consideration as compared to a standard corporate structure. This is due to the fact that the high level of distributions leaves issuers with a limited ability to reduce debt, and that issuers may be reluctant to reduce distributions should unexpected business pressures arise since trust units trade based on distribution yield,” it explains.
“At the same time, Moody’s has recognized that often the total of pre-existing corporate dividends, cash taxes, and share buybacks is approximately equal to the new income trust distribution total. It is therefore the potential lack of flexibility to reduce trust distributions compared to the greater flexibility inherent in reducing share buybacks and cash taxes in adverse circumstances that has concerned Moody’s,” it says.
“Nevertheless Moody’s recognizes that trust distributions are residual to debt interest and scheduled principal payments and in that sense represent a cash flow cushion to creditors. Moody’s also expects that issuers will ultimately reduce distributions if needed, although perhaps not as quickly as creditors would prefer,” it adds. “Finally, Moody’s realizes that many issuers have publicly committed to target capital structures and, especially for investment grade issuers, Moody’s has concluded that such commitments are likely to be maintained even if it means cutting trust distributions in order to do so.”
For existing rated trusts, Moody’s says that it believes that as the curtailment of the tax benefits of the structure will not occur until 2011 there will be no immediate impact on ratings, as decisions about changes in corporate strategy are difficult to predict. “Moody’s will nevertheless be quite interested in the future conversion plans of rated issuers, and, in particular, any announcements regarding the level of planned distributions to be effective once the new tax takes effect,” it says.
For corporations that have recently announced plans to convert to a trust structure, specifically BCE Inc., and Telus Corp., Moody’s is maintaining existing ratings and outlooks until those companies decide what they intend to do about their trust conversion plans and future distributions/dividends.
Tax decision credit neutral for most income trusts, Moody’s says
Ruling potentially a modest credit positive for BCE, Telus
- By: IE Staff
- November 6, 2006 November 6, 2006
- 08:35