Medtronic Takes On Debt For Covidien Inversion
The medical device manufacturer Medtronic has launched a USD17bn bond to finance part of its USD43bn corporate inversion acquisition of Ireland-based Covidien, in replacement of the cash held by its foreign subsidiaries that it was prevented from using following the United States Department of Treasury’s announcement of anti-inversion measures in September this year.
Treasury’s measures were intended to deter multinationals from using tax inversions to move their tax residence abroad – away from the high US corporate tax rate – and to prevent the methods by which inverted companies access a foreign subsidiary’s unrepatriated earnings while continuing to defer US tax.
In particular, the measures aimed at stopping “hopscotch” lending, whereby low-interest loans skip over that subsidiary’s US parent to go directly to a foreign company.
Medtronic has always confirmed that its transaction with Covidien is based on business logic and not corporate tax reduction, and that, while the Treasury has succeeded in making the deal more expensive, it has not stopped it.
As financing for the transaction’s cash consideration will now be secured from the capital markets, rather than from the USD13.5bn cash reserves held by its foreign subsidiaries, the company has, however, confirmed that its future ratio of gross debt-to-earnings will be worse than under its previous plans.
In that respect, it is notable that Treasury, in its announced measures, did not take any action to write more stringent rules to prevent inverted companies from loading their US subsidiary with increased debt after an inversion, and thereby deducting substantial interest payments to reduce their US tax liability.