Until Hunter Harrison, there was a lack of focus on how efficiently rail assets could be employed. Customers demanded service and the railroads invested. More equipment was better. The result was a consistent inability of the roads to cover their cost of capital. Herb Kelleher founded Southwest Airlines as a low cost no-frills regional. It first took off in 1971 and changed the nature of air transportation for millions of Americans. Both Hunter and Herb focused on transforming operations. Hunter’s message? Here’s what really matters: “Precision Scheduled Railroading”. Sales and customer service focus on driving top line growth while operations and investment measures focus on asset turnover and margin improvement (e.g. lowering the ‘operating ratio’ for railroads). In both the Air and Rail industry the challenge is to design, invest in, and manage network capacity so that it best meets customer demands while managing pricing, maximizing profitability, and meeting society’s goals. As Matt Rose, the retiring Executive Chairman of the BNSF recently stated, “It’s a three legged stool”. Customers, Capital, People (and politics).
What’s the key metric? Return on invested capital (ROIC) is the one metric that captures both operating margins as well as the capital required to generate it. It tells us how much a firm earns for each dollar invested. When ROIC is greater than your weighted average cost of capital you are creating “investment” value. Identifying the components of ROIC and acting on those components is what creates value. But ROIC is a Wall Street investment analyst measure and discussions are generally confined to finance departments. The genius of both Hunter and Herb is that they understood the components of ROIC. They inspired, motivated, and challenged their people to focus on constantly improving performance. Net operating profit after tax (‘NOPAT’) as a percent of Invested Capital is used to generate ROIC. The main components of invested capital include equipment, spare parts inventory, operational facilities, and the ‘working’ capital needed to run operations. But the formula doesn’t identify how to influence the value drivers. The ‘DuPont’ analysis disaggregates ROIC into its key parts: return on sales (NOPAT/Sales) and asset turnover, or capital productivity (Sales/invested capital). Both return on sales and capital productivity measures can be further broken down. It’s these components that managers must act upon. Understanding this allows operations to identify the causes of differences in performance over time and among competitors. Activities can then be designed to increase both return on sales and capital productivity, thus maximizing value. Strategies that improve capital asset productivity are the focus of precision scheduling railroading. Eliminating excess equipment from the system and increasing the productivity of remaining equipment. For Southwest Airlines it’s a commitment to their people and to operating a single type of plane (the Boeing 737). The other component of capital productivity is sales. So, finding ways to expand offerings that drive revenue growth using existing equipment is key.
The BNSF’s focus is on long term investment results. Charlie Munger, Buffet’s right-hand man, says “We don’t have to make the last dollar”. And, as Southwest’s Herb Kelleher once said, “We have a strategic plan. It’s called doing things.” With a focus on the mechanics of Air and Rail equipment finance, industry conditions, competition, customers, investment returns required to deliver capacity, and the people and politics of service delivery, we’ve designed a platform for sustainable Aviation and Rail investment. If you are interested, call us. Call RESIDCO.
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger, the other for opportunity. In a crisis be aware of the danger but recognize the opportunity.” – John F. Kennedy
2019 will create opportunities for those who are prepared. The reasons? Politics, the continued strength of the U.S. economy, and the economic challenges facing Europe and China.
China’s Economic State
In China, the economy is slowing. It’s burdened by excessive debt and dependent on government subsidies. Recognizing its low labor cost advantage, China has advanced its country interests by forced transfer of intellectual property so that products can be manufactured in China without the need to pay research and development cost. The result? Firms (and countries) that initially designed products can be out-priced and killed off. If you can see the future, you’ll recognize that Trump’s 90-day reprieve from increased U.S. tariffs (which expires March 1) is not likely to change the Chinese Communist Party’s basic industrial policy. In Europe, economies are slowing, and the United Kingdom faces a March 29 deadline to officially exit the European Union.
Transportation Investment Landscape
Since both aviation and rail transport assets are long term investments, it’s best to gather and analyze information that is available about trends taking place, and then adjust your investment tactics based on current investor behavior playing out around you. The Aviation and Rail investment markets are competitive. FlightAscend has identified 100 new names that have entered the commercial aircraft operating lease sector over the past 10 years. The competition has pushed lease rate factors on some deals to sub-0.5 levels with relaxed maintenance reserves and less stringent return requirements. Airline operators are pushing for shorter lease terms due to ASC 842 and IFRS 16. Sale-leaseback financing valuing aircraft at more than original airline capital cost is being supported by aggressive residual value estimates (on NEO and MAX aircraft).
The landscape for transportation investment has always been non-linear, turbulent, and in a state of flux. If you accept that the industry cycle has peaked and is heading on a slow downward trajectory, you’ll see today’s environment as providing a greater opportunity for value acquisitions. Strategy is done above the shoulders (tactics below) and a challenging market reduces competition. Interest rates, crude oil, and labor cost all affect the psychology of the market and influence the availability of capital and level of risk-adjusted returns available. Strategy recognizes the structural risks of financial and operating leverage which magnify the impact on profits of rising and falling revenues. The aviation industry is global (and its hard dollar assets are liquid). Since no one knows what the macro future holds, successful secondary market transport investment is created by developing opportunities that create current value. Superior investment results do not require the purchase of newly built equipment. Rather they come from buying existing equipment when the deal is good, the price low, the potential substantial, and the downside limited.
Value investing. For insight, experience, and confidence in judgment, call RESIDCO.
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Transportation asset finance is a growth business. Both the Aviation and Rail markets are healthy and long term investment trends remain favorable. With recent market volatility comes higher ranges of uncertainty. While investment risk may or may not increase over time, uncertainty grows at the square root of time. The more time, the harder it becomes to predict the future. The investment models you choose provide investment decision support. But the investment decision itself is a marriage between the decision model results and your level of personal experience. What drives the flow of capital into transportation investment alternatives?
What are the strategic alternatives? What contributes to value? What are you expecting? Traditional tools include income, cost, tax benefits, and market value analysis. Upside is an ally to be capitalized on while downside exposure should be limited. The future value of aircraft, aircraft engines, railroad rolling stock, their condition, and remarketability are a critical component of investment returns. Estimates of the future value of aircraft and railroad rolling stock can be described in terms of a distribution at any point during the investment term. Recognize that inflation will increase the price you can sell equipment for in the future. Inflation’s effects are fairly powerful. A 2.5% inflation rate over 20 years increases prices 64%, a 3% rate over the same period increase price 81%. It’s your risk tolerance that affects the future value you are willing to incorporate in your investment return calculations.
But risk also exists during the term of any lease and every lessor expects some percentage of its lessees will default. Supporting that investment is your transaction structure. Equipment values act as a backstop. Many things can happen while equipment is in the hands of a lessee; physical wear and tear, mandated regulatory changes, technological improvements, the price of market inputs (fuel, steel, monetary policy [credit]), and the stage of an ever-changing business cycle.
How the Economy Affects Company Decisions
The U.S. economy grew 2.9% last year (2.6% in the fourth quarter) driven by deregulation and tax reform efforts. The Federal Reserve predicts 2.3% growth for 2019. Recent months have brought crosscurrents and conflicting signals. Issues on the horizon include weaker growth in China and Europe, the Politics of trade negotiations, and the impact of the U.K.’s decision to leave the European Union. Reality is multidimensional and dynamic.
Examples? The three major U.S. Air Carriers are negotiating pilot contracts this year. Wages and scope clauses are on the table. Frontier Airline pilots recently overwhelmingly approved a new contract with a 53% pay increase. NetJets Pilot’s union signed an interim agreement that improved compensation for both long-term and new-hire pilots. The Rails are focused on improving operating ratios using Hunter Harrison’s precision scheduled railroading principles in order to better manage investment. Airlines and Class One Railroads are capital intensive businesses, tying up significant amounts of capital in their equipment and facilities. Both industries are using the current upcycle to strengthen their financial position as they prepare for a choppier environment.
To navigate successfully you’ll need access to market intelligence, relationships, technology and the practical experience gained from real life lessons. Call RESIDCO.
There is plenty of good news for the U.S. economy. The Fed maintains the economy is growing at a “solid rate” and inflation is near its 2% target. GDP growth for 2019 is forecast to remain over 2%. As the Fed pauses interest rate hikes, the era of central bank intervention in the markets is coming to an end. The current economic expansion now is expected to continue past June, becoming the longest expansionary period on record. Yet consumer confidence dropped in January for the third consecutive month. Are we coming to the end of the cycle, or was it simply the negative politics of the recent partial government shutdown?
Companies in the U.S. are reporting stronger results than those with overseas exposure. U.S. Railroads certainly don’t see a slowdown. Fourth-quarter 2018 freight car orders, deliveries, and backlogs present a long term sustainable market for the rail car builders. At 80,233 railcars, backlogs are at their highest level since the 2nd quarter of 2016 and new order positions extend out to 2020. While rail traffic for the full year 2018 was mixed, fundamentals support continuing traffic growth. Shipments of grain, petroleum products, intermodal, and the general merchandise business are offsetting worries over trade, politics, and a volatile stock market. Improvements in operating ratios continue as the Class Ones embrace precision scheduled railroading which focuses on uniform and scheduled train operations that minimize required assets and cost. Add a shortage of over the road truck capacity which has driven up truck rates, and the result is more traffic diverted to the railways, allowing higher carload pricing.
Similarly, since 2008 the global aviation industry has enjoyed a long period of expansion. With more airline passengers globally, the demand for aircraft has surged. Boeing and Airbus have seven to ten-year backlogs. Despite arguments over whether we have passed the peak of the cycle, aircraft investment remains driven by changes in GDP. And global air traffic in RPK’s (revenue passenger kilometers) continues to grow at rates in excess of the forecast long-term average of 5%. This is fueled by the growth of the global middle class – particularly in Asia. In addition, load factors are at record levels. Even with current jet fuel pricing, air travel remains a cyclical industry facing cost pressures due to a long-term shortage of pilots and mechanics. As builders introduce new aircraft models, older units appear to be depreciating at a faster pace. Yet delivery delays for new aircraft combined with lower fuel pricing and rising load factors have increased ‘midlife’ aircraft values and the level of trading activity in secondary markets.
Looking at the Future
Where are we in the business cycle? Macroeconomic factors impacting global economic growth include trade, geopolitical uncertainties, and individual country fiscal and monetary action. Growth and trade policy are deeply integrated. For example, if the President and Chinese leader Xi Jinping reach an understanding with respect to trade and tariffs the result would be immediate and favorable. Equipment leasing generates streams of cash, and for transportation equipment investors, the key lies in assessing the needs of their user base. Whatever your investment horizon, get the odds on your side by leveraging insider knowledge of transportation user needs, and future equipment values. The first step is to decide where you are, then decide how you will deal with the future. Paying heed to the cycle pays off.
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Investment analysis and business implications? US public companies will now be reporting under the new leasing standard (ASC 842) for fiscal years, and interim periods within those fiscal years, which took effect on Dec. 15, 2018. For calendar year-end public companies that means an adoption date of Jan. 1, 2019. Comparative prior year financial statements may need to be adjusted depending on the transition method applied (private entities have an additional year to comply).
The standard requires tracking new and existing leases entered into after the effective date, including existing leases that have pricing or contractual changes that might lead to modifications and reassessments. It also includes a variety of other lease transactions such as leased assets that reach end of term, are renewed, terminated or purchased, new subleases, sale-leaseback transactions, and embedded leases contained in outsourcing and service contracts. That’s a lot.
Measuring the Impact of ASC 842
How will U.S. airline and rail lessee balance sheets look after compliance? PWC estimates the new standard will impact at least 20 industries from retail to utilities. After retail, the second biggest impact will be on airlines. With almost 40% of world aircraft leased, average balance sheet footings for air carriers are expected to increase 47% as ‘right of use’ assets and related lease liabilities are added.
And since U.S. GAAP and International standards are not completely ‘converged’ dual reporting organizations will need to maintain different reporting systems! Over time that will lead to different balance sheet and income statement impacts. For operating lease income statement purposes, U.S. GAAP rent expense will continue to be recognized on a straight-line basis. IFRS front loads the expense recognition by replacing rent with depreciation and interest.
Will these reporting changes impact the analysis, or the economics of the ‘lease vs. buy decision’? Perhaps not. Leasing is and will remain, an important equipment financing alternative. It allows access to necessary assets, simplifies the disposal of used property, and reduces a lessee’s exposure to the risks inherent in asset ownership. Although an operating lease will now be ‘capitalized’, the capitalized dollar amount will be lower than if the asset was purchased. The Tax Cuts and Jobs Act further impacts lease analysis by limiting interest deductibility while allowing unrestricted ‘rent’ deductibility and 100% bonus depreciation. ASC 842 makes relatively few changes to existing lessor accounting rules other than the elimination of leveraged lease accounting.
For aircraft and railcar lessees, recognizing lease-related assets and liabilities on the balance sheet requires the development and maintenance of internal systems that support reporting and ultimately the business implications of the new standards. As 2019 unfolds, how will these changes affect portfolio investment, equipment values, and investment analysis?
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As we close out 2018, it’s time to look ahead. What’s in store for 2019? Equity markets and global political conditions are volatile while the fundamentals of the U.S. economy remain strong. Market turbulence can be caused by a number of factors; the impacts of some we can forecast, the impacts of others are not fully knowable. Everyone has opinions. Here are RESIDCO’s insights from our own analysis.
Unemployment and Wage Rates
Last week, the U.S. Bureau of Labor Statistics reported the unemployment rate unchanged at 3.7% (for the third month in a row). That’s a low not seen since 1969. Low unemployment tightens labor markets which lead to wage increases. Full employment elevates consumer confidence and drives consumer spending.
But rising wages pressure inflation and the Federal Reserve’s expected response will be to continue to raise interest rates which will create a moderately more challenging business environment.
Also announced last week, U.S. shale production turned America into a net oil exporter for the first time in 75 years. Crude oil and jet fuel pricing are moderating. Trump’s Tax Cut and Jobs Act and deregulatory agenda have driven domestic growth above trend.
GDP has expanded by 3% over the past year and the Federal Open Market Committee expects it will continue to grow above trend in 2019. Over the past thirty years, the average growth in revenue passenger kilometers (“RPK”) has exceeded global GDP growth by about 1.7 times each year. Applying this history to recent International Monetary Fund economic forecasts implies expected global passenger growth of ‘around’ 6.3% for 2019. Despite market turbulence, the outlook for 2019 remains positive. Commercial aircraft manufacturer order books certainly support this optimism.
Bracing for Turbulence
Prior to every flight, a pilot checks the weather. Flight risk is mitigated by adjusting routes to avoid thunderstorms and icing. The FAA defines Clear Air Turbulence (“CAT”)’ as sudden, severe turbulence occurring in cloudless skies that causes violent buffeting of an aircraft. It’s a recognized problem that affects all flight operations and is especially troublesome because it is often encountered unexpectedly and frequently without visual clues to warn pilots of the hazard. The first step in avoidance of hazards? Establish access to the best available information for planning flight operations.
Similarly, when heading into economic turbulence consider your investment horizon, goals, and risk tolerance. Different aircraft portfolios react to turbulence in different ways. The solution is to develop a set of protocols that deal with uncontrollable events. An example: earlier this month the yield curve flattened, producing its first ‘inversion’ in more than a decade. History shows inversions have preceded all nine U.S. recessions since 1955 (with lag times from six months to two years). The year ahead won’t bring the end of the current cycle. There is time to dodge market turbulence, secure the cabin, and adopt defensive investment strategies.
Late cycle investing for current income and capital appreciation? Call RESIDCO.
Before Hunter Harrison, the prevailing view was more locomotives, more railcars, and more crews allow for the movement of more volume. But because track and yard capacity is finite, adding more equipment creates congestion and slows the system. While it is counterintuitive, reducing fleet size enables a road to move more volume by running fewer (longer) trains, faster. ‘Scheduled’ service results in better asset utilization and higher profits.
The results CSX is delivering are pushing the remaining U.S. Class Ones to consider adopting similar strategies as North American railroad executives face investor pressure. By rigorously scheduling service and eliminating bottlenecks, ‘Precision Scheduled Railroading (“PSR”)’ transports the same or more freight with less capital in the form of railcars, locomotives, and classification yards. Classification yards are choke points that slow traffic.
After dropping out of Memphis State to work as a dispatcher in a rail switch tower, he said: “It was then I learned that how you arrange schedules and manage assets are the key.” In his eight months at CSX, Hunter Harrison converted no fewer than 7 of CSX’s 12 hump yards into ‘flat-switching’ (by a locomotive on yard tracks) facilities resulting in faster deliveries from origin to destination.
Hunter Harrison’s legacy? Root out schedule inefficiencies, minimize asynchronous traffic flows, reduce cost, and create opportunities for timely ‘scheduled’ delivery. Focusing on efficient network operations results in maximum use of existing equipment and ultimately will change how the industry invests.
A Locomotive Industry Shift
Union Pacific is moving to follow the same playbook. It has idled 625 locomotives, with plans for idling another 150 by the end of this year while removing 6,000 cars from its network with plans to cut an additional 10,000 railcars over the near term. Compare PSR to airline network operations. Aircraft fly on schedules with minimum time on the ground. The efficient use of aircraft results in less investment and improved yields. ‘Scheduling’ operations allows matching of staffing, asset levels, and work sequences accurately. CSX results demonstrate this.
As Class Ones effectively implement PSR, network and terminal velocities will improve. Improving service will grow market share, take traffic from the highway, and deliver enhanced financial results for both the Class Ones and shippers, thus enticing new private investment in rail assets.
The Goal? Right-sizing capacity while implementing efficient asset management techniques. The results? Timely deliveries, improved returns on invested capital, and satisfied customers. Rail equipment knowledge creates opportunities that unlock portfolio values in this environment. Interested? Call RESIDCO.
The commercial aviation fleet consists of large passenger jets with over 100-seating capacity and regional jet aircraft with up to 100-seats capacity. Regional jets fly routes that can’t be flown profitably with the larger aircraft. About 43% of all domestic major carrier U.S. flights use the smaller regional jets to bring passengers to their mainline hubs (travelers prefer the regional jet to turboprops, and American, Delta, and United are removing the last of their turboprops this year). From 2017 to 2032 it is expected the U.S. will account for 70% of the world’s regional jets.
The U.S. Regional Jet Market
Our domestic markets are competitive, and fares have fallen due to increasing capacity, the growth of domestic discount carriers and consolidation in the industry.
The major U.S. air carriers are focused on optimizing the profitability of both their mainline and regional networks. The current hub and spoke model of the major carriers allow larger aircraft to serve major population centers while the regional jets serve smaller communities that are too far for a turboprop, but not busy enough to make a larger aircraft profitable.
Profits are closely tied to carrier networks, their labor contracts, fuel cost, and the capital cost of aircraft. Mainline pilot union’s “scope” clauses limit the number and/or seating capacity of aircraft a major air carrier is allowed on a “regional” airline (to protect higher-priced union jobs from being outsourced to lower-priced regional pilots).
The Evolution of the Regional Jet
Bombardier stretched its Challenger business jet in 1989 into a small airliner seating 50, the CRJ100. They followed with the CRJ200 which also seated 50 but had more efficient engines. Brazil’s Embraer followed with its ERJ135 (37 seats) and ERJ145 (50 seats). Even as the OEMs move to larger regional jets this market is facing the same challenges as the larger aircraft markets. Increasing use of the latest materials and most efficient engines ensures the latest generation of regional jets will be as lightweight and efficient as the larger jets.
While larger jets will always beat out the smaller aircraft based on their economies of scale the reason the majors operate the smaller jet is to find the right size the aircraft to the mission. In markets that cannot exploit the larger aircraft, the regional jet flourishes. In these markets, the smaller jet offers better economics and flexibility. As an example, United is adding regional capacity to drive traffic to its hubs. And frequently the term “regional” is a misnomer when for example airlines will add smaller jets to beyond the “region” to enhance schedule availability. United’s 2018 fleet plan calls for an increase in its regional fleet by 36 aircraft, with 50-seat regional jets accounting for virtually the entire increase. The current availability of the 50-seat jets has made it a short to mid-term solution until United can reach a deal with its mainline pilot’s union.
Regional Jet Investment Opportunities
Regional jets have transformed the airline industry by facilitating much of its expansion. These jets allow increased profitability and flexibility in route planning. They’ve helped build the legacy carrier hubs and, as United is demonstrating, continue to do so. As oil drops, the 50 seaters offer immediate availability. The legacy network carrier and their pilot unions hold the key to weight and seat count restrictions on future deliveries of larger regional jets.
Recent tax law changes provide an opportunity for rethinking investment planning. Consider how you might optimally structure investment in air and rail transportation equipment in today’s tax environment. Planning offers advantages when a solid understanding of the various ‘decision contexts’ that give rise to tax opportunities are understood. Efficiency is gained from integrating this strategy into the larger equipment investment, management, and residual remarketing picture.
The objective is to develop a ‘framework’ for thinking about how tax affects investment. Investment requires capital. Capital availability depends on the comparative profitability of financing alternatives. Financing alternatives are impacted by tax law. This upfront understanding is necessary since it oftentimes is costly to adjust investment structure and financing decisions once they are made.
Tax and Investment Planning for 2019
Effective planning requires consideration of the implications of investment on all parties. Everything being equal, and barring restrictions or limitations on income shifting, taxpayers would prefer to have income taxed at the lowest rate (or, not at all!). It is always desirable to defer paying tax as long as interest is not being charged on the tax liability. This approach requires a ‘global’ or ‘multilateral’ approach, rather than a ‘unilateral approach.
Consider both explicit and implicit taxes. Explicit taxes are the dollars paid directly to the taxing authority. Implicit taxes appear in the form of lower before tax rates of return on certain investments. In any planning effort, all cost should be considered. Tax represents only one of many. An example: the dollars you spend on tax planning are considered a tax-favored activity since for business that investment is generally tax deductible, while the payoffs (reductions in tax payable) are effectively tax-free. The higher your marginal tax rate, the higher the returns you will enjoy from your planning efforts.
Tax strategies involve the level of tax, relative rates across different activities, entity types, tax regimes, and structuring the use and economics of timing and payment of tax. Life would be simple if tax rules were unambiguous. But the tax rules are far from clear. Even if you could claim to have committed to memory the entire Internal Revenue Code, you would be able to resolve only a small degree of ambiguity in many of your investment structuring activities. Over the years taxpayers have displayed considerable ingenuity in attempts to manage this exposure.
Understanding The Impact of Tax
Understanding tax mechanics allows you to become a leader rather than a follower in business and investment activities. The rules of the game constantly change, and structuring alternatives have a real-world impact on investment returns. Are taxes ‘fair’? Of course, they are. They’re fair when someone else pays, and ‘not fair’ when you pay. That is why investment tax strategies have value!
Air and rail investment that combines efficient entity structuring with in-service equipment and experienced equipment management and remarketing have substantial value. Think ahead! Whether the Tax Cuts and Jobs Act remains in place will to a large extent be determined by the party in control of Congress. Taking advantage of opportunities now will ensure your investment is as protected as possible.
With a highly developed, liquid, and efficient secondary equipment market, strong corporate governance, and stable legal institutions, the U.S. has traditionally provided foreign investors with a stable and welcoming market. Prior to the recently passed Tax Cuts and Jobs Act (“TCJA”, the “Act”), there was a tendency to lend into the US and benefit from the tax rate arbitrage between the U.S. and foreign lending jurisdictions.
Now, with the passage of the pro-growth TCJA and reduction in regulatory hurdles, we can expect more foreign direct investment in the U.S. equipment leasing equity and debt financing markets.
With respect to inbound investment, the most groundbreaking changes under the Act include the lowering of the U.S. corporate tax rate to 21%, implementation of new NOL deduction and carryforward rules, new and more stringent interest expense deduction limitations, the denial of interest expense deductions from hybrid* transactions and entities, and the new base erosion and anti-abuse tax.
*Hybrid transaction structures are designed to create ‘stateless income’ through the manipulation of differences in the treatment of entities under the laws of different jurisdictions.
There are many different types and methods of investment, such as the direct acquisition of a capital asset or the purchase of an equipment leasing portfolio. Cross-border investment has been addressed by the Organization for Economic Co-operation and Development (OECD) through its Base Erosion and Profit Shifting (BEPS) legislation which is designed to address the practice of shifting profits and assets across borders to minimize overall global taxation.
The TCJA adds a new Base Erosion and Anti-Abuse Tax (“BEAT”) designed to provide a disincentive to ‘erode’ the U.S. tax base by making deductible payments (including interest and royalties) to foreign related parties. It’s largely aimed at inbound investment and its anti-base erosion provisions effectively apply a 10% minimum tax for taxable income adjusted for base erosion payments (but only for businesses where US gross receipts are greater than $500 Million, aggregated on a global group basis).
Additionally, highly levered foreign-owned capital-intensive businesses will be impacted by the denial of interest and royalty deductions from “hybrid” transactions.
U.S. affiliates of majority foreign-owned firms produce more than a fifth of all U.S. goods exports. With the first major reform of the U.S. tax code in 30 years, the Act is extending U.S. domestic economic growth. Combined with a renewed focus on enabling businesses to operate with greater efficiency, “There has never been a better time to invest, grow, and create jobs in the United States.”
The scope of the implications of inbound investment changes, particularly in the context of inbound financing structures may cause many inbound financing structures to fail to qualify for the portfolio interest exemption (The ‘portfolio interest exemption’ allows a non-U.S. lender to avoid U.S. tax on U.S.-sourced interest income).
As a result, an understanding of individual fact patterns is necessary to determine the net effect of these reforms on specific foreign direct investment activity. Drawing conclusions remains a question of working through the rules on a fact-specific basis, making assumptions, and assessing the impacts. And, with the upcoming 2018 midterms might there be a shift in the balance of political power? Will tax reform survive in part or in whole?
For inbound capital equipment investment and management solutions, Call RESIDCO.
The Global economy is projected to contract 4.9% in 2020, with World merchandise traffic falling 13 to 32% and a 50 to 60% decline in air passenger revenue miles. In response, more than two-thirds of governments across the world have scaled up fiscal support with budget measures now standing at 6% of GDP on average. […]
Liquidity buffers, loans, restructuring operations, cost savings. As the pandemic lingers it continues to depress economic activity. The drop in passenger traffic is driving air carriers to constantly adjust network flight schedules and evaluate equipment needs and workforce reductions. United is exploring the possibility of a fall workforce reduction and American is considering similar plans. […]
Aviation and rail equipment lease rates and equipment values are stressed as operators adjust equipment capacity to meet current levels of demand (and adjust to the Class One Roads implementation of Precision-scheduled railroading “PSR”). In the near term, lessees are focused on ensuring the sustainability of their business by attempting to defer new delivery commitments […]