U.S. corporations are snapping up interest rate swaps to convert fixed-rate debt into floating to match cash positions they have built up in an attempt to improve their balance sheets during difficult market conditions. Most of the corporates have issued fixed-rate debt, but the cash positions are earning a floating rate in the money markets, which is leading the corporate treasurers to review their risk, explained one New York-based marketer.
Limited Brands, the holding company of retail giants including Victoria's Secret and Bath & Body Works, is one firm that has increased its cash portfolio year-on-year as a result of more conservative management, said Greg Teed, assistant treasurer in Columbus, Ohio. As a consequence, the corporate is weighing the benefits of entering into its first interest rate swap, he said.
Limited Brands has grown its cash holdings to just over USD2.2 billion from around USD1.5 billion last year. Most of the cash is invested in floating-rate short-term money market instruments, according to Teed. By contrast, the firm has a total of around USD650 million in 10 and 30-year fixed-rate debt. Bob Gay, head of fixed income research at Commerzbank Securities in New York, explained that matching corporations' fixed and floating-rate assets and liabilities can help optimize their capital structure, which in turn creates savings to the bottom line.
The steep interest rate curve has for a few years encouraged corporates to increase their floating-rate exposure, although a widespread belief that a rate hike by the Federal Reserve was on the way may have dissuaded some players from entering the market, said Gay. Recently, this belief has shifted and few commentators see such a hike on the horizon, he noted. In turn corporations who have been slow to enter into interest rate swaps may have been given an extra push in that direction.
Not all corporations, however, agree. American Electric Power increased its cash holdings to USD1.2 billion last year from USD224 million in 2001, but Renee Hawkins, director in regulated finance at AEP in Columbus, Ohio, does not think now is the right time to enter a swap because rates are too low. In addition, AEP has some floating-rate debt which allows it to maintain a fixed and floating mix.
