The economic stimulus package put forth by President Obama and passed by Congress in February contains a host of provisions to jump start the weak economy through a series of tax breaks, spending plans in areas like health care and infrastructure and an increase in unemployment benefits.
It also contains a tax deferment component that makes debt buybacks by companies with the cash to do it much more attractive. Stanley Works, the company known for hand tools like hammers and screwdrivers, is one such company taking advantage of the new law (officially known as the American Recovery & Reinvestment Act of 2009).
Stanley said today that it bought back $103 million face amount of junior subordinated debt for $59 million – a $44 million gain. Normally, a company would have to pay taxes on that gain in the year it receives it.
But under the stimulus act, if you meet certain conditions, and Stanley does, a company can defer paying taxes on gains from debt repurchases for five years. And even then you can phase in the taxes for a five year period.
Smart use of Stanley’s cash by its chief financial officer – the company becomes less leveraged, it reduces interest costs, it records a nice little gain this quarter, and it can take money that would have been used to pay taxes to invest in other things for now.