If implemented, President Bush's elimination of an investor-side tax on dividends could indirectly impact the ABS market, though not in any sweeping way, analysts said.
Existing multi-sector CDOs with real estate investment trust (REIT) exposure could feel a pinch, as REITs which already enjoy preferential tax treatment and are presumed not to benefit from the reform would cheapen as they lose value relative to other investments.
"That's the most direct potential impact on structured paper that's already out there," said Dan Castro, top researcher at Merrill Lynch.
For existing CDOs, the cheapening is probably negligible, because multi-sector CDOs don't generally trade in and out of REIT positions. However, while existing multi-sector CDOs would see the market value of their portfolios decline slightly (REITs generally do not exceed 5% of the pool), multi-sector deals ramping up would benefit from the higher yielding REIT paper.
In its daily Situation Room, Banc of America Securities researchers commented "The dividend proposal is unambiguously positive for the credit markets as it encourages the shift away from over-leveraged balance sheets that is already underway."
Bush's plan would eliminate the so-called "double taxation" of dividends, where corporations are taxed on the dividend payout and investors are taxed for the gain. According to BofA, eliminating the investor-side tax would encourage corporations to raise equity capital that might have otherwise issued debt.
Again, CDOs are likely to bear the brunt of the impact if corporate debt issuance declines and the collateral market shrinks, though this would mostly impact the investment grade market, because high yield issuers do not have as much access to the corporate market, Merrill's Castro noted. Further, most investment grade CDOs are done synthetically and are not particularly reliant on the cash market for collateral.
On the non-CDO side, consumers might begin to favor stable dividend yielding stocks over money market accounts, as the return profiles shift. Said Alex Roever of Banc One Capital Markets, money market investors account for a large part of the ABCP buyside.
"This could take some of the buying pressure off of the short end of the asset backed curve," Roever said.
Of course, no one knows what the final package will look like. Any relief to consumers would be considered a positive for ABS, but the impact on issuance is subject. Would large, publicly traded issuers pare down their programs in favor of equity capital for funding?
Since CDO equity is not taxed in the U.S., the proposed reform would not apply, though if it did, perhaps CDOs could return more on less leverage. Also, the exclusion is aimed at publicly traded companies, which would further rule out dividends on CDO equity as a candidate for exclusion, a securitization accountant said.
