In a report titled “Inversions Lower Tax Liabilities, But Also Can Impair Credit Ratings,” Standard & Poor’s Rating Service states that the credit positives of inversions, such as lower taxes and increased access to offshore cash and investments, are often outweighed by negative credit consequences, including higher leverage and the initiation of shareholder-friendly activities, which can undermine liquidity.  Specifically, the report identifies the following credit risks raised by inversions:

  • More aggressive financial policies, including higher leverage to fund acquisitions, spurred by the attraction of tax inversion benefits
  • Easier access to previously “trapped” cash, leading to more aggressive share buybacks and dividend payments, which can weaken liquidity and raise adjusted leverage metrics
  • Large tax-driven acquisitions can constrain a company’s financial capacity to conduct further strategic acquisitions needed to replenish its product portfolio
  • Future legislation limiting tax inversions, which could expose re-domiciled companies to higher US tax liabilities than anticipated
  • The potential for public, political, media, and customer backlash when an inversion is announced