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Browse topics and content
  • cross-currency swaps
  • deposits
  • emerging markets
  • Hedging
  • interest rates

Corporates boosted cash returns in 2019 while interest rates fell

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Even before the Covid-19 crisis, short-term interest rates were falling. Using a combination of swap strategies and emerging market deposits, large US companies are keeping cash and bond returns above market rates.

by Nick Dunbar and Manpreet Singh

Published: March 30th 2020

The top 30 non-financial companies in the S&P 500 index increased the average returns on their cash and securities investments by 20 basis points last year, even as the US federal funds rate fell by 90 bps and short-term rates in other markets fell further. According to a EuroFinance study of recent filings, companies are continuing to use aggressive swap overlay strategies and emerging market deposit investments to buck the interest rate trend.

Effective Interest Rate

According to its SEC filings, retail giant Walmart holds 100% of its cash and bonds outside the US. In 2018, cash and investments for Walmart held outside the US was $7.7 billion but in 2019, these increased to $9.5 billion. However the effective interest rate on these investments fell in 2019 by 80 basis points.

Walmart’s performance may be a result of falling interbank rates in emerging markets. Keeping money offshore brought in less interest income in 2019 compared to 2018. For instance, Brazil’s interbank rate fell by 200 basis points in 2019, while interbank rates for India and Indonesia fell by 100 to 135 basis points respectively.

And as offshore cash performance declines, companies are disclosing less about it. Coca-Cola in 2018 reported the highest investment held outside the US among the top 30 S&P 500 index companies, but last year it stopped disclosing the amount of investments held outside the US. The company earned an effective interest rate of 3.8% in 2019, according to analysis of filings.

A Coca-Cola spokesman told EuroFinance: “The company is no longer disclosing year-end cash balances held by foreign subsidiaries. We began this disclosure many years ago, prior to U.S. tax reform. Post tax reform, we no longer deem it material to disclose the amount of cash held by foreign subsidiaries”.

Meanwhile, derivatives remain an important part of maintaining higher returns. Johnson and Johnson at the end of 2019 held $65 billion of notional amount of hedges and derivatives comprising of $45 billion in foreign exchange contacts and $20 billion of cross-currency, up from $35 billion and $7 billion from 2018 respectively. Classifying the swaps as net investment hedges, the company posted its lowest interest expense in last 10 years.

Walmart in 2019 held $3.7 billion in cross-currency swaps designated as net investment hedges which were $2.2 billion in 2018. While Coca-Cola has stopped reporting its offshore investments in 2019, its foreign currency economic hedges have dropped from $10.9 billion in 2018 to $4.2 billion in 2019.

Although IBM doesn’t disclose its offshore investments directly, the computer giant has reported a jump in economic hedges which can be used to protect against the impact of FX moves on these investments. The company held derivative instruments designated as net investment hedges of $7.9 billion in 2019 compared to $6.4 billion in 2018. The derivative instruments which are designated as economic hedges of foreign currency exposure also increased from $5.2 billion in 2018 to $7.1 billion in 2019.

The mean investments held by top 30 S&P companies surveyed by EuroFinance showed a decrease of $8.7 billion and mean interest income dipped by $78 million in 2019 compared to 2018. The collective holdings at the start of 2018 were well over a $1 trillion but in 2019 it fell by $140 billion, due to a reduction in bond investments. The interest income earned by the companies in 2019 was $500 million less than they previously earned in 2018.

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