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Coca-Cola is selling €1bn of new debt that it may use to help pay potential charges arising from a decade-long dispute with the US tax authorities, in which the company could owe $16bn.
The US soft-drinks maker said on Thursday it planned to issue two €500mn bonds with the proceeds used in part “for making any potential payments in connection with our ongoing tax litigation with the [Internal Revenue Service]”.
The “reverse Yankee” issuance — in which US companies raise money in the euro-denominated bond market — comes a day after the Financial Times revealed that Coke could owe $16bn in back taxes arising from shifting part of its manufacturing processes to countries such as Ireland and Brazil. The total is enough to wipe out a year and a half of profits, with the figure rising by more than $1bn a year.
The €1bn sum it will market this month is split equally over two senior unsecured bonds with maturities of 13 and 29 years, and will also go towards paying Coke’s final 2025 payment for its purchase of Fairlife, a producer of ultra-filtered milk drinks. It will potentially be used to pay off other outstanding debt.
According to a US tax court judgment last week, the company has been hiding “astronomical levels” of profit in low-tax countries to shield it from the US authorities.
Coke’s planned issuance makes it the latest US company to turn to Europe’s bond markets this year, as borrowing costs for euro-denominated debt have been lower than for US dollar debt.
US companies, including Johnson & Johnson and Booking Holdings, had raised a total of €30bn in so-called reverse Yankee deals by May this year, according to data from Bank of America.
Barclays, BNP Paribas and JPMorgan Chase are the bookrunners for the deal, which will be settled on August 15.
The debt issuance comes as Coke will already have to pay an initial $6bn in cash to cover unpaid taxes and interest for the years 2007 to 2009, after losing the last of a four-year series of court decisions last week.
The beverage group will be able to reclaim the penalty if it wins an appeal, which it plans to launch later this year.
The stakes are not only high for Coke, as the $16bn could cover the annual IRS budget and will test the agency’s ability to pursue complicated cases at a time when it has promised to get tough on corporate tax avoidance.
Neither the $6bn penalty nor the $10bn it could owe for the subsequent 15 years are likely to show up as a hit to Coke’s earnings in the near term.
The payments do not have to be put through its profit and loss account if the Atlanta-based company and its auditor EY agree that there is a better than 50-50 chance of Coke winning on appeal.
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