Greenspan Warns Against Tax Changes on Buyouts

Federal Reserve Chairman Alan Greenspan urged Congress Thursday not to reduce tax deductions for interest paid on bonds and loans used to finance corporate takeovers.

Greenspan told the Senate Finance Committee that restricting deductions for interest paid on high-yield bonds and other debt to finance leveraged buyouts, takeover defenses and corporate restructuring “would create adverse secondary consequences.”

In response to questions, however, Greenspan said it is not possible to “figure out in advance” what the consequences of tax-law changes would be and acknowledged, “If it were done over a long period of time, I suspect the market implications would not be large.”

‘Could Create Panic’

Greenspan’s comments conflicted with comments by Bush and Reagan Administration officials who have put part of the blame for the October, 1987, stock market crash on an aborted attempt then by the Ways and Means Committee to modestly restrict interest deductions on debts incurred in corporate restructurings.

Securities and Exchange Commission Chairman David S. Ruder warned the Finance Committee on Wednesday that tampering with the tax code could create another panic in a “skittish and nervous” stock market.

Both the Finance and Ways and Means committees are re-examining leveraged buyouts in the wake of the pending $25-billion purchase of RJR Nabisco Co. by Kohlberg Kravis Roberts & Co. and the $13-billion buyout of Kraft Inc. by Philip Morris Co. last year.

Those were the biggest two of more than 300 leveraged buyouts totaling nearly $100 billion in 1988.

Assets Secure Debt

Two weeks before he took office, President Bush, in discussing buyouts, left open the possibility of changing the way the tax laws treat dividends and deductions for interest payments on “junk bonds.”

A leveraged buyout is similar to a person buying an automobile on credit with a very small down payment. In the case of the auto purchase, a three- to five-year loan is secured by the value of the car being bought.

With a leveraged buyout or restructuring of a corporation, high-interest junk bonds secured by the company’s assets are issued to buy stock from shareholders at premiums 45% or more above its market price beforehand.

To cover the interest payments, the new owners often have to cut back on research, sell off some assets or divisions, close stores or plants, lay off workers or cut their pay and reduce pension contributions.