EuroFinance

US healthcare giant Johnson & Johnson used derivatives to slash its net interest expenditure by $392 million in the first half of the fiscal year 2019, which is the largest decrease since 2014. The saving amounts to four per cent of the company’s net earnings for the period.
“Net interest expense was lower by $132 million, primarily driven by the positive effect of net investment hedging arrangements and certain cross-currency swaps”, Chris DelOrefice, VP of investor relations at Johnson and Johnson said during Q2 2019 earnings call, referring to the decline in interest costs versus the same quarter a year earlier.
Johnson & Johnson’s notional amount of hedges and derivatives in 2019 increased by 33% to an all-time high of $65.5 billion. Cross-currency swap notional alone doubled to $15.3 billion in 2019, up from just $2.3 billion at the end of 2017. At the same time, the company reduced its foreign currency debt to $5.62 billion, a decline of 10.5% from the previous year.
But Johnson & Johnson typifies a new trend where treasurers are looking at innovative methods to increase cash and securities returns during a period of low interest rates. In such cases, the derivatives no longer have a debt hedging function.
For example, Paypal, the US payments company, boosted its interest income by $45 million with an effective interest rate of 1.52 per cent at the end of 2018 by holding $10.7 billion notional of FX contracts ‘not designated as hedging instruments’. The company used FX swaps to earn dollar-denominated returns on its assets in the euro area.