By Timothy Aeppel and Laura Matthews
NEW YORK, Dec 23 (Reuters) - Some U.S. companies are hedging their bets on the Supreme Court case against President Donald Trump's sweeping emergency tariffs by selling their rights to collect potential government refunds of the taxes to outside investors.
Atlanta-based Kids2, which makes 95% of its toys and infant products in China, is one.
Mark Mintman, the company's CFO, calls it a "cost recovery action." He first heard about selling potential refunds during a September
meeting with bankers in New York, where one mentioned that a secretive market has emerged for selling the claims.
Under the deals, companies receive a fraction of the refund as an upfront payment. They keep that money if the tariffs are overturned and the government is directed to refund the taxes, but they give up the balance to the investors. They also keep the money if the tariffs are upheld, while investors get nothing.
This is just the latest twist on Wall Street’s keen ability to capitalize on cash flow. Similar markets exist for selling future payments from structured lawsuit settlements and lottery-winning annuities. David Bowie famously sold his royalty cash flow in what became known as "Bowie Bonds."
President Trump has said it would be an "economic disaster" if the tariffs are overturned. It’s not clear when the high court will issue its ruling, and whether companies will be entitled to refunds that could total more than $100 billion if Trump loses.
"We remain confident in the legal merits of the President's lawful use of tariffs," said a White House official in a text response to Reuters.
WALL STREET FORGES NEW MARKET IN RECOUPING TARIFF COSTS
Mintman said he worked with a division of Jefferies LLC to find the buyer, a Boston-based hedge fund. He declined to identify the buyer because of a nondisclosure in their agreement. A spokesman for Jefferies declined to comment on their work brokering such deals.
There was pressure from the hedge fund to conclude the transaction quickly, said Mintman. The hedge fund required the deal to close before oral arguments at the high court, which took place in early November. The Supreme Court typically takes months to issue rulings after hearing oral arguments. The Trump administration has asked for a quick decision but the timing remains unclear.
Mintman said, among other things, he talked to his legal counsel to get an opinion on the trade and checked Polymarket, the prediction market, to see what the chances were that the tariffs would be ruled unconstitutional. The company, known for brands such as Baby Einstein, received a total of $2 million, a fraction of the $15 million they had paid to U.S. customs through September.
Kids2 received 23 cents on the dollar for tariffs they paid under the 1977 International Emergency Economic Powers Act. The use of this law to impose tariffs has drawn wide criticism, since it doesn’t directly reference tariffs. It does say the president has the authority to regulate imports during a national emergency.
The company got less—nine cents on the dollar—for separate emergency tariffs aimed at stopping fentanyl smuggling. The lower payment reflects the assumption that fentanyl tariffs are more likely to be upheld, said Mintman.
GETTING A 'LITTLE SOMETHING' BACK AHEAD OF SUPREME COURT DECISION
Known as "special situations" trades, these deals are attractive to investors because the assets are uncorrelated to broader markets and offer potential upside if the court strikes down the tariffs as unconstitutional, two legal sources who are working with buyers and sellers in the market told Reuters.
"There's a very well-established market...where there are buyers...who are willing to provide instant liquidity to parties that are uncertain as to when, if ever, they'll be able to monetize these claims," said Raniero D'Aversa, partner and chair of law firm Orrick's restructuring team.
Orrick started seeing demand for refund claims soon after tariffs were implemented in April. Many buyers are currently quoting 16-17% for fentanyl tariff claims and 26-28% for reciprocal tariff claims, said Amy Pasacreta, of counsel, on Orrick's restructuring team.
"Some [are] saying, 'you know what, I'd rather get my 10, 20, 30 cents because Supreme Court could very well say they're constitutional.' And if that's the case, at least I get a little something recouped," said Pasacreta.
That's a good description of Kids2’s motivation. Mintman said it took two years to get fully reimbursed for tax credits the company received under a program that rewarded firms for avoiding layoffs during the Covid pandemic.
"I'd anticipate customs would be inundated if this is overturned," he said, "so not expecting we'd get anything quickly." Given the value of money received now—rather than possibly years from now—the company "thought it was a good deal."
He also liked the odds. Going by the history of this administration’s success with cases before the Supreme Court, Mintman said he estimates a favorable outcome for Kids2 is still only 50-50. "In the back of my mind," he said, "I think I got 2 million bucks for free."
To be sure, many companies are passing up the opportunity to sell their claims. Mark Bissell, CEO of vacuum maker Bissell Inc., said he’s been approached about selling his refund rights but has no interest. He said it reminds him of late-night television ads that offer to buy the rights to payouts under life insurance policies. And he suspects the administration will find a way to keep collecting the taxes.
"My view is that if the Supreme Court finds tariffs illegal, that the administration has plan B or C or D up their sleeve to throw at it next," said Bissell.
Meanwhile, back at Kids2, they are considering another round of hedging—to recoup some of the tariffs paid since September.
Mintman said he just asked Jefferies whether investors are still buying claims, and if so, what they're paying.
(Reporting by Timothy Aeppel and Laura Matthews; Editing by Megan Davies, Daniel Burns and Anna Driver)
