• cross-currency swaps
  • derivatives
  • investment hedges

Johnson & Johnson gains $1bn from swap bet


The US healthcare giant entered into $20 billion of cross-currency swap trades last year to hedge euro investments. The unusual trades are now paying off.

by Nicholas Dunbar and Manpreet Singh

Published: 16 June 2020

Outside the cash-rich tech sector, most large companies have more in debt than cash and investments, and pay more in interest expense than they earn as interest income. But with the help of $20 billion in cross-currency swaps, arthritis-to-baby-product giant Johnson & Johnson has bucked the trend.

Despite having a $27 billion debt portfolio, and $9 billion of net debt after deducting cash and investments, the company posted for the second successive quarter a negative interest expense, or income, as a result of the swap trades. Johnson & Johnson also booked almost $1 billion in mark-to-market gains on the swaps during the quarter.

“Interest (Income) Expense in the fiscal first quarter of 2020 was a net interest income as compared to an expense in the same period a year ago”, the company stated in its 10Q SEC filing. “This was primarily due to the positive effect of net investment hedging arrangements and certain cross currency swaps”.

This has come at a time when many other companies are struggling to earn income on their investments as central banks keep interest rates low during the Covid-19 pandemic. Johnson & Johnson posted a $970 million gain on hedges and derivatives it held in the first quarter, of which $138 million was reclassified to earnings.

Johnson & Johnson's Interest Income and Gains on Derivative and Hedges

At the end of the quarter, the company held $64.1 billion in derivatives consisting of foreign exchange contracts and cross-currency interest rate swaps. Although the amount of derivatives dipped by $1.3 billion in Q1, this was solely in foreign exchange contracts. Cross-Currency Swaps held by the company amounted to $20.1 billion in Q1.

Johnson & Johnson's derivatives & investments

Johnson & Johnson, which recently started clinical trials of a Covid-19 vaccine, is only second non-tech company after Anthem to post net positive interest income in Q1 among the top 25 companies at the S&P 500 index as ranked by their amount of investment holdings at the end of 2019.

Out of the top 25 companies on the S&P 500 index, seven companies posted net positive interest income and five of these are tech companies with a positive net cash position. Among non-tech companies with positive net debt, only health insurer Anthem and Johnson & Johnson posted positive interest income in Q1 2020. Highlighting the importance of the derivatives, all these companies also earned a higher effective interest rate on their cash and investments than Johnson & Johnson in Q1 2020.

Net interest income vs net debt

Key banking relationships

Advisory banks will have played a key role in structuring the cross-currency swaps for Johnson & Johnson. The company has raised $34 billion in debt and equity since 2010 according to data by Refinitiv. Goldman Sachs has remained the most important relationship bank to raise debt and equity capital for Johnson & Johnson by volume, underwriting 10 issues with a combined value of $6.6 billion followed by Deutsche Bank, Citi, JP Morgan and Bank of America at $6 billion respectively.

However, fees are also an indicator of the depth of banking relationships. Johnson and Johnson paid $630 million in investment banking fees for merger & acquisition advisory, equity and debt capital markets underwriting, and syndicated loans since 2010 according to data by Refinitiv. JP Morgan was paid the most for this work at $127 million for 24 deals followed by Goldman Sachs, Bank of America and Citi at $116 million, $77 million and $66 million respectively.

Johnson & Johnson, which is AAA-rated with a negative outlook, took care to insulate itself from counterparty credit risk with lower-rated banks. In Q1 2020, the company received $1.7 billion in cash collateral from counterparties according to filings. Coincidentally, this was the same amount the company spent on share buybacks in the same period.